Appendix C: My Years with General Motors [Part 3]
by Alfred P. Sloan, Jr.
Questions from Reading Selected Chapters
(Each student will be prepared to discuss the answers to each of the following questions in class.)
Chapter 11: Financial Growth
1. Complete the following: “Of necessity, during ___________________and _________________, this has meant that dividends have been something less than average. The shareholders thus assumed the risk of building for future with no certainty of ________________.”
2. Sloan identifies three periods of corporate existence, from a financial standpoint. What were they?
3. Relative to expansion the 1920 annual report reflected what strategic position that was: “unwise to undertake the production of materials that do not __________.”
4. Complete the following: “so rapid a growth could not have been financed entirely __________.”
5. Complete the following: “most of the expenditures were made in ________, and so the corporation had to go to __________________.”
6. In 1919 the company attempted to put together a syndicate to raise $50,000,000 but only raised how much? What does it mean by syndicate?
7. Why did the 1920 issue of securities fail?
8. What does Capital employed mean?
9. What does New Working Capital represent?
10. By the end of 1922 bank debt was liquidated and assets conservatively valued. At what capacity did the company operate? Was this a good move?
11. Compare the capital expenditures of the two periods 1918-20 and 1923-25. Was this consistency and inconsistency good strategically and/or tactically?
12. What European car companies were acquired in 1925 and 1929? Assess these strategic moves.
13. Complete the following: “Thanks to the ___________ and _____________ controls, we were able to finance virtually this entire expansion program out of ____________ and ___________ and still pay out almost two-thirds of ____________ to shareholders?
14. During the depression, how many years did the company fail to earn a profit or pay a dividend?
15. Do you agree with the dividend policy during the depression?
16. Complete the following: “I think the story I have told shows that we had simply ____________. This was perhaps the greatest payoff of our system of ___________ and _____________ controls.
17. Complete the following: “As a result of the speed with which we acted when sales began to fail, we were able to ____________ in line with the sales decline and to _______________ so that operations remained profitable.
18. Complete the following: “Our sales declined _______ percent, from __________ million in 1929 to only ___________ million in 1932.
19. What would justify the dividend payout in 1932?
20. What adversely affected earnings in 1937?
21. What produces a very rapid obsolescence of productive facilities in the automotive industry?
22. By 1935 the corporation gave consideration to three special factors affecting capacity. What were they?
23. What percentage of earnings was paid in dividends between 1930-39?
24. In the 1930s how did capital expenditures compare with provision for depreciation?
25. Complete the following: “The strategic question in industrial finance, assuming you have something to work with in the way of a going business, is how to __________.”
26. Complete the following: “in principle, __________ enhances the return on the stockholders’ investment, while at the same time increasing the _________ involved.”
27. Between 1921 and 1946 what was the corporations policy toward long-term debt?
28. “The Challenge” recognized that an urgent need would exist, when the war ended, to convert plants from war to peace production as quickly as possible in order to do what three things?
29. What three areas were addressed in the long-term studies that projected the company’s position for five to ten years?
30. In 1946 were dividends greater or less than earnings? By how much?
31. Who did the company look to for long-term borrowing in mid-1946?
32. Why was the preferred-stock issue of 1946 attractive?
33. Complete the following: “We had learned from experience that wars create a __________.”
34. What is wrong with this statement: “it was clear that we would have to raise new capital if we were to continue to pay out a substantial part of each year’s earnings in the form of dividends.”
35. The stock offering of 1955 required the underwriters to subscribe to what percent of the issue.?”
36. The market price of General Motors stock, rose from how much in 1945 to what level in 1962?
37. Complete the following: “The measure of the worth of a business enterprise as a business, however, is not merely ___________ or _________ but _____________ since it is their capital that is being risked and it is in their interests first of all that the corporation is supposed to be run in the private-enterprise scheme of things?
38. Identify two things of interest in the charts showing General Motors historical data.
39. Complete the following: “Due to the ___________ and through a ____________, the units of industry have become larger and larger. This is because of the continuously ___________ for industry’s products and services resulting from the production of ___________ at __________. There is superimposed upon this evolutionary process the additional influence of an increasing integration of manufacturing processes involved in mass production. The effect of such an evolution on the capital structure is to require ever increasing ______________.”
40. Complete the following: “Our performance has been demonstrated day by day in our production and distribution of _________________.”
Chapter 17: GMAC
1. GMAC was in competition with what four other types of financial institutions?
2. What does Sloan mean by “closed business”?
3. What is the difference between retail and wholesale credit?
4. What created the need for a broad approach to consumer financing?
5. If people had to pay for large purchases in cash, what would be the impact on the economy, i.e. jobs, production, and sales?
6. Complete the following: “Bankers…thought of the automobile as a ___________ and a ___________, and not as the greatest revolution in transportation since the railway.”
7. Complete the following: “[Bankers] believing apparently that whatever fostered __________ must discourage ______________.”
8. Complete the following: “As the business grew and manufacturers continued to require cash on delivery, dealers simply did not have funds to finance ____________, not to mention _______________.”
9. At the time the book was written what percent of all automobile retail sales in the United States were on installment plans?
10. From the period of 1919 to 1933 what was the maximum loss ratio for automobile sales financed through installment loans?
11. What is meant by “trust receipts or other security documents?”
12. Between 1919 and 1963 did GMAC finance the sale of more new or used cars?
13. If a sale is financed through GMAC, does the dealer or GMAC undertake collection of payments from the customer?
14. In the beginning, what were the two primary motives for GM starting GMAC?
15. The risks in consumer financing centered around what three problems?
16. Because of the risks in consumer financing the company relies on what four factors supporting the extension of credit?
17. Complete the following: “Installment credit, he said, nor only strengthens the motive to ________ but increases the individual’s ____________.” Do you believe this?
18. What effect does installment credit have on purchasing power and production?
19. How did GMAC deal with the possibilities of loss collateral (the care itself)?
20. Why was General Exchange Insurance Corporation needed?
21. Is GMAC a “nonrecourse system” or not?
22. What was the “6% plan” offered by GMAC?
23. Why did the federal government go after GMAC?
24. What were the major contributions of GMAC to GM, consumers, and society?
Chapter 22: Incentive Compensation
1. General Motors, in 1942 gave what justification for a bonus plan?
2. Is there any relationship between a bonus plan and decentralization?
3. Complete the following: “the interests of the _____________ and ____________ are best served by making ___________ partners in the corporation’s prosperity, and that each individual should be rewarded in proportion to his contribution to the profit of ______________ and of _______________.”
4. What modification to the incentive plan occurred in 1957?
5. What does the “6 per cent” limit indicate?
6. What is the maximum that can be paid out?
7. Is the bonus plan a profit-sharing plan? Why or why not?
8. What is the benefit derived by paying a bonus in stock?
9. Complete the following: “it provided for bonuses to be paid to employees ‘who have contributed to its [General Motors] success in a special degree by their ________, __________, ___________, ___________, or ____________.”
10. How were employees determined to be eligible for bonuses?
11. What was the “Manager’s Securities Company?”
12. Was the “Manager’s Security Company” concept sound?
13. What were the two reasons Du Pont put up stock in the MSC?