Decision-making guide

Copyright© Cesim Oy 2000-2020

1. Simulation platform introduction

1.1. General user interface options
1.2. Home
1.3. Decision checklist
1.4. Decisions
1.5. Results
1.6. Schedule
1.7. Teams
1.8. Readings
1.9. Forums
2. Decisions
2.1. Main objective and winning criterion
2.2. Successful decision-making flow
2.3. Best practices for good teamwork
3. Market outlook
4. Demand
4.1. Total market and company market share
4.2. Market shares
5. Production
5.1. Production costs
5.2. Inventory
5.3. Investments
5.4. Procurement
6. Human resources
7. Research & development
8. Marketing
9. Logistics
10. Taxation
11. Finance
11.1. Suggestion for capital structure decisions in case you have accumulated excess cash
12. Projections
12.1. Income statement
12.2. Balance sheet
13. Calculation of key financial ratios
1. Simulation platform introduction

1.1. General user interface options

1. Profile - Here you can change your email, password and add a personal picture to be displayed on
various parts of the user interface. You can also change your account's language and time zone, and
determine the automated email notifications you wish to receive. Please enter a valid email address
to avoid missing out on important information from your instructor or teammates. You will also
need it should you require the "Forgot my password" feature.
2. Help - Here you can reach the Cesim Support team if you run into problems or issues relating to in-
game functionality. For any content-related questions, contact your instructor.
3. Logout - Use this button to log out.

1.2. Home
 1. Results summary - These graphs show your performance in relation to the competition.
2. Activity - This section shows you recent activities, including the history of decisions submitted and
the rounds' deadlines.
3. Tasks - If your instructor has assigned a quiz or a peer evaluation to your course, you will find it
here. Should you be required to submit document(s) to the platform, the link will be shown in this
section.
4. Messages - Forum posts will be shown here.

1.3. Decision checklist

The Decision checklist displays all decisions made in the game. It shows both a Team Decision Area
and the individual Student Decision Areas. Each team member has a decision-making area, where
they can input any figures and see the effects they have on the projected results. By default, the
students always start with their own Student Decision Area when logging in to the game. When the
deadline passes, the round results will be calculated based only on the Team Decision Area.

The Decision checklist offers several tools to manage the decision-making process:
 1. Round-based drop-down menu - Use the drop-down menu to select the desired round. You may
select previous rounds in order to review the decisions made during those rounds, although
modifications will be disabled.
2. Legend - The different colours of the cells will help you to identify the active decision area and
whether a change has been made to the decisions.
3. Go - This button allows a player to view another teammate’s Student Decision Area, or the Team
Decision Area. Any modifications will be automatically recorded in their respective area. Any
modifications made in the Team Decision Area will be used as final decisions when the round ends,
should no further actions be taken. Be careful about relying on direct modifications to the Team
Decision Area. If any team member overwrites (copy as team’s decisions) existing decisions in the
Team Decision Area with their own, there is no backup for the overwritten decisions. Making plans
on your personal Student Decision Area ensures the decisions are safe, as your teammates cannot
overwrite decisions in your own area with a single click.
4. Copy as team's decisions - This button copies a player’s decisions from the Student Decision area to
the Team Decision Area. Once copied, the previous set of decisions cannot be recovered. Decisions
can be copied from the Student Decision Area to the Team Decision Area as many times as needed
prior to the round deadline. If decisions are made directly into the Team Decision Area, then no
additional steps need to be taken, as they will be automatically used to calculate the results when
the round ends.
5. Import - This button transfers the decisions made in a Team- or other player’s Student Decision
Area to the importing player’s own Student Decision Area. Once imported, the original decisions of
the importing player cannot be recovered.

1.4. Decisions
The Decisions are split into sub-categories (e.g. Demand, Production, etc.). Some areas should be
filled in first, as they affect other areas.

There are two general types of input fields:

 1. Decision cells - The decision cells can appear as input cells, drop-down menus, checkboxes or
buttons.
2. Estimation cells - Estimation cells are where you can enter sales estimates, personnel turnover, etc.
These estimations act as a basis for the budgets shown in the system.
The system automatically updates the budgets and calculations as you make decisions and/or
estimations.

1.5. Results
The round results are calculated as the deadline passes, using the decision sets in each team’s
decision area. The results from previous rounds, including possible practice rounds, are accessible
and you may also download the results as presented in an Excel file or as a slideshow of main
indicators.

1. Universe-based drop-down menu - This allows you to choose any universe in the course. A
universe is a group of competing teams affecting each other’s results.
2. Round-based drop-down menu - This allows you to choose the desired round results.
3. Excel - Here you can download an Excel file showing the results of the chosen round.
4. Print - This button allows you to print the results of the round.
5. Slideshow - This button will allow you to view a slideshow of the key indicators of the round.

1.6. Schedule
 The Schedule page displays a timetable of the rounds’ deadlines. The results are calculated as soon as
the deadline of the round passes. Unless otherwise restricted, decisions can be made on each round as
soon as the previous round’s deadline passes.

An instructor can choose to have up to three practice rounds for a course. Once the practice round(s)
are over, the game will reset to the initial market situation. The initial decisions for the first actual
game round are imported from the first practice round. Other than that, the practice rounds have no
effect on the results of the actual game rounds.

1.7. Teams

The Teams page contains the teams' compositions across all the universes of the course. On this page,
you may also edit your own team’s information, such as the team name, slogan and/or team
description.
 At the start, when no deadlines have passed, you can join any team that has an empty slot. Simply
click the Join Team button. After the first deadline has passed, only the instructor can move
participants between teams.

1.8. Readings

This section contains documentation that participants need to read and comprehend in order to enjoy
the game. The generic reading materials include this decision-making guide and a case description.
Instructors can also upload additional materials here.

The case description gives information regarding the business case that is being played on the course.
It gives a general understanding of the company, industry, trends and challenges.

1.9. Forums
The forums are a great place for players to contact their instructors or fellow players, especially in
situations where face-to-face time is limited.

There is a Team Forum, a Universe Forum and a Course Forum. The Team Forum allows your team
members to see posts and reply to them. The Universe forum only exists if multiple universes feature
on the course, and can be seen by all players in the respective universes. The Course Forum is
available for every player registered on the course.

Instructors can view and reply to forum posts in the three sections. As such, the Course Forum is a
good place to ask questions that everyone on the course can benefit from, while the Team Forum is
the ideal place to discuss sensitive team-related issues.

Players will be notified by email whenever something is posted on their team forum area (unless they
choose to disable this function in the Profile section).
2. Decisions

2.1. Main objective and winning criterion

The goal of the simulation is to maximize the total cumulative shareholder return. This includes the
change in the share price, dividends paid out to shareholders by the company, and the accumulated
returns that the dividends would generate for the shareholder if invested elsewhere. The Cumulative
Shareholder Return is given as an annualized percentage. It is important to note that paying out
dividends early means that you have less own capital to profit from and/or to increase the share price
with, but that the returns will have a longer time to accumulate.

2.2. Successful decision-making flow

These instructions will help you as you go through the decision-making tool for the first time. When
you are more familiar with the model, you can make decisions as you prefer.

2.3. Best practices for good teamwork

For each round, appoint a "CEO" who is ultimately responsible for coordinating the team effort and
submitting the final decisions. Circulate the CEO role from one round to another.
Pay special attention to timing. Each team member can work independently, but be sure to
coordinate efforts for maximum synergy.
Use the Team Forum to exchange ideas about strategy and decision-making. The forum will store
your correspondence so that you can refer to it later on while deciding how to implement your
strategy.
Agree on an internal deadline for each round, by which time each team member will have made
his/her own decisions and suggestions. This deadline should leave enough time for the team to
select the optimal decision prior to the actual deadline.
Use the Decision checklist to inspect and select the final team decisions. Here you can see all team-
members' decisions side-by-side. You can also access each team-member's Student Decision Area.
You can use a team-member's decisions set as the starting point for the team decisions, and then
make the necessary adjustments. You can also directly edit team decisions in the Team Decision
Area.
3. Market outlook

1. It is essential to read the “Market outlook” before you start to make decisions. They contain
important information on current market trends and possible future developments.
2. At the top of the page you'll find the “Projections” button. Here you can find your projected results
with regards to projections (balance sheets and income statements), main ratios and the simulation's
parameters. These parameters (costs, exchange rates, tax rates, etc.) are presented for the current
round and the previous one. You can take advantage of this information e.g. when planning for
taxes, logistics and investments.

Note

Quantitative parameters, such as tax rates, are forecasts for the round and they tend to be
fairly accurate. Market development, on the other hand, can differ from Market outlook,
since markets are influenced by the actions of competitors. Therefore, market growth may
not materialize exactly as predicted.
4. Demand
 1. It is advised to start the decision-making process by estimating the total market growth for each
market area. The information on the "Market outlook" page will help you make these estimations.
2. After estimating the market growth, you can choose which products you want to sell in each area.
Each area has two product slots. At the start, your company does not have all the technologies for
production and sales. As you go further into the game, it becomes possible to research and
manufacture more sophisticated technologies. (See the chapter on “Research and Development” for
more information about new product development.)
3. Now that you have chosen which technologies to sell, the next task is to estimate the market shares
you expect for each product. These forecasts are used by the model to calculate your company's
projected income statements and budgeted production figures. The “Last round” column shows the
market shares that the company had in the previous round. Total market shares for the current and
last round for all three regions can be seen below the table.
4. Once you have estimated the total market growth and your market shares, you can see the expected
demand for each area here. Keep in mind that these are only estimations; the actual results depend
on the success of your decisions relative to the competitors.
5. These graphs give projections of advancements in planned infrastructure/network coverage for all
four technologies. The infrastructure for each technology is a prerequisite for demand; a technology
will not have any sales unless its infrastructure is in place. Higher coverage indicates a higher
potential for demand. Network coverage is an important factor in determining the demand for
products using new technologies.
Demand for a team is determined in three steps:

1. The total market size for each market area is calculated based on the parameters.
2. The total market demand is then divided into different technologies.
3. The market shares for each company are determined. The factors affecting the market shares are:
the number of offered features; selling prices; promotion; the previous round’s market share; and
the attractiveness of the technology on the market.
The attractiveness of each technology may vary a lot depending on the market area. New
technologies tend to be more attractive than older ones and thus generate more demand. However,
sometimes a new technology may flop in some market areas, but be a huge success in others. The
market outlook can give more insight into the expected attractiveness of new technologies.

The division of demand between technologies is also strongly affected by:

Price level (a new technology is usually priced higher than an older one)
The number of companies offering products using that technology
Marketing efforts

4.1. Total market and company market share

 1. Factors affecting the total market size:
Economic conditions
Average price level
Average promotional budget
Technological evolution
2. Factors affecting a technology's share of the market:
Price level of the technology
Promotion of the technology
Number of companies offering the technology
Network coverage
Attractiveness of the technology
3. Factors affecting a company’s market share for the technology:
Price
Promotion
Number of offered features
Previous round’s market share
Number of companies offering the technology

4.2. Market shares

Everyone starts with the same market share, but as soon as you start making decisions, the market
shares start to change. The picture below illustrates an imaginary situation with four different teams.

1. Team Yellow, 30%

2. Team Purple, 15%
3. Team Blue, 22%
4. Team Green, 33%
Team Green's market share consists of two products

5. Team Green's Tech 1 has a 25% share of the total market area
6. Team Green's Tech 2 has an 8% share of the total market area
By combining the market shares of these two technologies we get the company’s total market share
of 33%. Remember: when estimating demand percentages for your products, the percentage estimate
refers to the whole market area, not the demand for that specific technology.
5. Production
Global allocation of production is an important success factor in this simulation. There are two
production areas from which you can supply the three market areas.

1. Here you can allocate technologies to each production line, and production line capacity to each
product. With two production areas and two production lines in each area, you can select any
combination for the four technologies. In this example, production lines 1 and 2 are used for both
production areas.
2. The simulation automatically calculates the unit cost (see “Production costs” section). The Scrap
(%) depends on the maturity of each technology in production. Scrap (%) is taken into account in
the unit cost.
3. Here you can decide how much production is contract manufactured. You can only allocate
technologies which are chosen for production at your own production lines. There is a limit as to
how much you can contract manufacture during each round. The cost of contract manufacturing is
also given here, and it varies according to the manufacturing amount. In this example, production is
allocated to contract manufacturers in USA but not in Asia.

Food for thought

The cost of excess capacity allocation consists of inventory management costs, the cost of
capital tied into the inventory, potentially excessive production unit costs and the risks
associated with having excess inventory of old products.

5.1. Production costs

The production costs are affected by the following factors:
 Basic cost level in the production area
Production cost function (U-shaped curve)
Learning curve effect
The basic cost level indicates the cost of producing the first unit of the new technology. For example,
if the initial employee skill level/efficiency is lower in Asia, the basic cost will be higher in Asia than
in the USA.

An example of a U-shaped production cost function can be seen below. The cost multiplier is used to
multiply the basic cost level.

1. Cost multiplier
2. Capacity utilization
The learning curve effect is a significant factor regarding production costs. The X-axis represents the
cumulative GLOBAL production of a certain technology. In our example, you could start production
in USA before moving production to Asia when the learning curve reaches a certain level. The
example below illustrates the logic.
 1. Unit cost, USD
2. Global cumulative production per technology

5.2. Inventory
 In this page, you will find detailed information regarding your company’s inventory planning. You
can access the inventory holding cost information by selecting “Parameters” in the “Projections”.
Inventory management costs are based on the average inventory of the previous and current round.
Capital costs are the implied costs of having capital tied into inventory.

The beginning and ending inventory figures are also presented on the “Logistics” page. Inventory
planning is managed by production volume decisions in relation to sales volumes and does not
require any active input from the participant on this page.

USA and Asia production facilities have their own inventories and products are never shipped
between the areas unless there is market demand. All products in inventory are carried at their
original production cost. Oldest products are sold first (FIFO principle) and there is no depreciation
of inventory.

5.3. Investments
1. Here you can estimate the global demand for the next two rounds. Demand for the current year is
based on estimates made on the “Demand” page. Future projections are important because
production facilities usually take 2 rounds to become available. You can check the “Capacity
planning” graph to see when capacity will become available.
2. Based on your future growth expectations, you can decide whether to invest into new production
facilities in USA and/or Asia. They will usually be available after 2 rounds and you will always
have to pay for them in the middle of the investment cycle (i.e. one round further on from the
current one).
3. This graph contains information on the projected evolution of your demand and capacity. It is a
useful tool for visualizing the relationship between your estimated demand and capacity.
 Food for thought

When you make a plant investment, you are committing a substantial amount of money into
a long-term investment. You need to be sure that you can pay for the investment with the
revenue that you make from it.

For example: the price of the plant is 160 M USD and plant capacity is 550 k units. You can
sell your products in the future at about the same price as you are currently managing in the
US, about 200 USD. Furthermore, your average operating profit before depreciation is about
35%. When you multiply the annual plant production capacity (assuming that you use the
plant at an average of 90% utilization rate) by the expected margin per product, you get
about 35 M USD operating profit before depreciation (550 k units x 90% x 200 USD x
35%). This needs to cover the depreciation and the costs of financing the plant. Here
depreciation is calculated as 15% based on declining balance. This gives you a depreciation
of 24 M USD (160 M USD x 15%) during the first year of operations. (Declining balance
emphasizes the first years over the last ones, which is reasonable in this kind of high-
technology business environment). After depreciation, you have 11 M USD (35 M USD - 24
M USD) left to cover financing and investor risk.

Return on investment (ROI) in this example is 6.9%. That is calculated by dividing

Operating profit (EBIT) by the cost of the investment (11 M USD/160 M USD).

5.4. Procurement
On the “Procurement” page, you can decide which component suppliers you want to order from, and
you also have the option of ordering a study on any of the suppliers.

You have two types of decisions to make in the “Procurement” section:

1. Deciding which suppliers to contract. The minimum number of suppliers needed is shown at the
bottom of the screen. Contracting a new supplier induces a small setup cost.
2. Ordering a study on the conditions at a supplier’s facilities. Conducting an objective study reveals
the future direction of the unit costs and social responsibility standards. Results of the study become
available one round after being ordered, and the results reveal information for the following two
rounds.

There is some information available for each supplier to assist you in your decision-
making:

3. Social responsibility values are shown in the form of star ratings for each component supplier.
“Ethics” refers to how well suppliers treat their employees and “Sustainability” indicates their
environmental responsibility. Using socially conscious suppliers is part of your company’s social
responsibility and will affect both your public image and the demand for your products.
4. Each supplier has a unique unit cost i.e. how much you pay for each product manufactured. As the
component procurement is outsourced, your production efficiency will not affect the unit cost. If
you are using multiple suppliers, it is assumed that the component orders are split evenly between
 the selected suppliers i.e. you will be paying an average unit cost based on the unit costs of the
selected suppliers.
5. Study results - Arrows indicate an increase or decrease in value since the previous round. An icon
showing small arrows up and down mean no change has occurred.
Failure to select the necessary amount of suppliers will lead to an insufficient amount of components.
Consequently, you will have to make last minute arrangements to satisfy production demand,
resulting in additional costs.

Food for thought

In order to manage your socially responsible image effectively, you should follow a strategy
that best suits your situation. The options are either to aim at cost leadership, or to thrive as a
leader in social responsibility.
6. Human resources

On this page, you will be able to hire personnel to handle your in-house Research & Development.

Your management of human resources requires three decisions to be made: how many employees
you require for this round, along with budgets for monthly salary and training. You can choose the
workforce as you wish, assuming your salary level is sufficient. You can also lay off as many
employees as you wish. (You can hire or lay off employees by changing the "Personnel this round"
decision from its prior value.) Employee turnover is updated automatically, and the amount of laid-
off employees will be reduced by the amount of employees leaving the company of their own accord.

Salary, other associated employment costs, training, recruitment, layoffs and other R&D costs are
included in “R&D” on the Income Statements. You can find more information about costs by
selecting “Parameters” in the “Projections”.

Key drivers to consider with regards to human resources include employee turnover and efficiency.
Employee turnover refers to employees leaving the company of their own accord (i.e. without being
laid-off). Salary, training, company performance and the efficient use of employees' time affect the
employee turnover rate. Higher salaries, cumulative training expenditures and low turnover all
support a higher level of employee efficiency. The more efficient your workforce, the easier it gets to
develop more advanced technologies and product features. Efficiency is measured as a multiplier; an
efficiency multiplier of 1.2 means that your R&D personnel is 20% more efficient than a team that
has a value of 1.
7. Research & development
There are two ways of improving your company's technological capabilities: in-house development
and license purchasing. In-house development has a one-round delay before the technologies and
features researched become available for production, while license purchases make them immediately
available for production.

Both methods are substitutable and complementary ways of building competence, which means that
you can first develop features thanks to your own R&D before deciding to buy a license and improve
the technology further, again with your in-house R&D. You can use any combination of the two
methods to reach the desired level of technologies and features.

The required amount of person-days for in-house development varies based on your level of
employee efficiency. The ultimate cost of development also depends on your salary and other HR
decisions. This means that you have to synchronize your product development decisions with your
human resources decisions.

It is important to note that in-house development doesn’t reduce costs for technology and design
licensing. For example, if Team Green decides to start to research a new technology using in-house
development, but fails to invest enough to complete the development, whereas Team Red proceeds
without any investment on the same round, the licensing cost for the unfinished development on the
following round is the same for both teams.

1. These graphs show the development progress and the number of features available for each
technology (Tech).
2. Here you can make decisions about your own R&D investments for each technology. The platform
indicates how much investment is required in order to make a new technology available or add a
new feature for an existing technology. Keep in mind that all research from your own R&D
investments are available with a delay of one round.
Food for thought

R&D investments are very strategic in nature and it is difficult to apply any exact investment
calculation method to them. At best, such calculations require heavy assumptions and
uncertainty. Nevertheless, when considering investments into new technologies, you should
think how many products you must sell in order to recover the money that you spent on the
development. Following your competitor may not be the best alternative, since they can also
make poor investments.
8. Marketing
On the Marketing page, you decide upon the number of features proposed for each product and also
your marketing mix i.e. product, price and promotion. These decisions need to be made for each
product and market area. It is important to keep in mind that the success of your marketing mix will
be determined by the markets. Customers will be comparing different alternatives and make their
purchase decisions accordingly.

1. The first decision you make is to decide upon the number of features offered. More features cover
more of the various customer preferences, but also incur more costs.
2. Decisions regarding price and promotion are set here. Pricing decisions are always made in the
currency of the area, while promotion is always given in USD. Promotion has a long-term effect.
3. As soon as you have decided upon product, pricing and promotion, you can see your budgeted
financial outcome here.
4. Here you can view the amount of products available and the potential unsatisfied demand or ending
inventory.
The implementation of different product features leads to costs. You can implement one to ten
features for your products, with each feature carrying an additional cost. Features can only be
implemented if your company has reached the respective technology competence level, by either
using in-house development or buying technology and design licenses. Feature costs can be
calculated by multiplying the number of features by the feature cost. You can find more information
about the feature cost by selecting “Parameters” in the “Projections”.
Food for thought

When you make your decision regarding promotion, you should analyse the sales margin that
you can generate with that product in the specific market. However, in the medium term you
must be able to pay for all the product’s promotion with the sales margin that the product
brings in. A useful rule of thumb is to allocate approximately 10% of the sales margin,
depending on the effect of the promotion in the market. You should expect to spend a further
amount during the launch of a new product.
9. Logistics

1. Here you can choose the order in which you will satisfy demand in the different markets, both for
production areas and all the relevant technologies. E.g. For Tech 1 production, which will take place
in the USA, you may prioritize the USA followed by Asia and finally Europe. This decision is only
relevant if your global supply is insufficient to fully satisfy your global demand. If that should
happen, supplies will first be cut from the third market (Europe), then from the second market
(Asia) and lastly from the first market (USA).
2. Here you can see where your products are made and expected to be sold. The total cost of
transporting products is the actual transportation cost + tariff. You can find more information about
the transportation costs and tariffs by selecting “Parameters” in the “Projections”. There is no
transportation cost for products that are sold in the same area they are produced in. There are two
types of tariffs: flat and ad valorem. Flat tariffs are charged as a fixed fee per product imported,
while ad valorem tariffs are based on the value of the product defined by the transfer price and the
feature costs. Both tariff types may be in use simultaneously.
Food for thought

When you set the priorities for delivery, you should attempt to maximize your total margin
from the products. This can be achieved by prioritizing those markets where unit margins are
the highest. In other words, if you run out of supply, you want to make sure that it happens in
the market where your unit margin is the lowest.
10. Taxation

1. Here you can adjust your profits between different units and you can make other business units
participate in R&D and other fixed costs. Transfer pricing can also be used to benefit from different
tax rates between countries. The multipliers must be between 1 and 2. The transfer price is thus 1 to
2 times the product’s direct unit cost.
2. This chart shows taxable profits and effective tax rates, for all regions and the company as a whole.
3. This table details how the effective income taxes are calculated and divided among the regions, and
how transfer pricing decisions affect the total amount of payable income taxes. Taxes are always
paid locally. The statutory tax rates are applied to taxable profits, meaning that losses from previous
rounds (called loss carry forward) reduce the amount of taxes that have to be paid in the current
round and consequently lead to effective tax rates that are lower than the statutory rates. Moreover,
transfer pricing can be used to shift profits between the regions so that more profits are reported in
low tax regions, thus reducing the effective tax rate of the whole company.
11. Finance
Financing decisions are typically the final set of decisions that you make. All financial market
transactions are managed through the parent company (USA). You decide upon:

increases (+) and decreases (-) in long-term debt

the issuing of shares
share buybacks
dividend payments
treasury management (transferring funds between group companies)
The issuing and buybacks of shares are made according to the market valuation at the start of the
round. The number of shares issued (repurchased) affects the issue (buyback) price.

You can also transfer funds between different countries using internal loans (International Treasury
Management). You may want to use internal loans if you have accumulated substantial cash reserves
in Asia or Europe that can be repatriated and distributed to the owners, or if you need to finance some
plant investments in Asia.

There is a minimum end-of-year cash requirement of 2 million USD. If cash falls below this level,
the financial department automatically fills that gap with short-term debt. Short-term debt is
automatically paid when possible and it is usually more expensive than long-term debt. You can find
more information about the difference between interest rates for short- and long-term debt (Premium
for Short-Term Debt) by selecting “Parameters” in the “Projections”.

Try to keep in mind that the idea is not to minimize the cost of debt, but to maximize the return on
equity. The winner of the game is determined by the total shareholder return, which measures the
return that the team is able to generate for the shareholders during the simulation rounds.
 1. Here you can decide upon:
increases (+) and decreases (-) in long-term debt
the issuing of shares
share buybacks
dividend payments
2. In this graph, you can view the capital structure of the company. Try to avoid an extreme imbalance
between debt and equity.
3. Here you can transfer funds between different countries. It is usually recommended to finance
Asian and European operations via the parent company in the USA.
All finance decisions are made for the parent company (USA). While making these decisions, it is
useful to observe the parent company's cash flow statement on the right.

11.1. Suggestion for capital structure decisions in case you have

accumulated excess cash
 After financing group activities in the three areas, check the cash situation in the USA. If you have
excess cash, you can consider the following logic:

1. Check the capital structure. As a rule of thumb, you should try to keep the equity ratio (equity
divided by total assets) within the range of 40-60%. If it is less than 40%, it is more beneficial to
repay debt than to pay a dividend. If it is more than 60%, you are probably not fully benefiting from
the tax shield effect (related to Weighted Average Cost of Capital, WACC).
2. Decide upon the amount of cash and/or short-term debt required as a "safety buffer" for your
operations. The more uncertainty you have in your sales estimations, projections and budgets, the
higher your cash buffer should be. The short-term loan premium should be compared to the
difference between the interest of both cash and long-term debt.
3. Pay dividends according to your dividend policy.
4. If you still have excess cash, pay it out to the owners. You have two complementary alternatives:
Buying back shares - If you buyback shares, you improve the earnings per share
(repurchased shares are immediately cancelled). Note that you should buy back
shares over a long time period. If you attempt to buy a large amount at once, you
will create demand in the market and the average buyback price rises.
Pay extra dividends - Dividend payment will be taken into account as part of the
total shareholder return. (I.e. Money is transferred from the company cash-box into
the shareholder's cash-box.)
The weight between share buy-backs and extra dividends is mainly driven by taxation. Since we only
consider corporate tax in the simulation, the recommendation is that you set a dividend policy that is
in line with your long-term profitability.

Of course, timing is a key factor. The old investor rule of "buy low, sell high" applies in corporate
equity transactions as well.

Food for thought

The reason why you should maintain an approximately equal amount of equity and debt on
your balance sheet is that by doing this, you minimize your cost of capital. The smaller the
cost of capital, the higher the net present value of all your company's future cash flows, thus
the higher the market value of your company. In other words, the lower the cost of capital,
the more investment opportunities that exceed the cost of capital (i.e. more business).
12. Projections
The projections are easily accessible from any decision making page by simply selecting the button
in the top-right corner of the page. They update continuously as you make decisions or estimations.
They form the projected results for the round, hence the name “Projections”. The actual results
calculated at the deadline will differ due to the estimations never being entirely accurate.

12.1. Income statement

Here you can follow the group's projected profitability, both as a whole and for each individual area.

In this simulation all R&D and promotion costs are expensed on the income statement for the round
the investments are made. As a consequence, profit for the year may fluctuate depending on the
intensiveness of decisions relating to R&D and Promotion.

R&D is considered to take place in the area(s) where you have production plants. E.g. if you only
have production plants in the USA, your entire R&D expenses will appear in the USA income
statement. When you have production in Asia as well, R&D will be split proportionally between
USA and Asia according to the number of production plants in each of them. Note that you can also
use the transfer prices to roll R&D costs to other areas (e.g. Asia, Europe).

Administration costs include the company's overhead costs i.e. the company's fixed costs, which are
not allocated to the different products. Administration costs include the basic cost per market area
and an extra cost for service and maintenance of the production plants. This cost is dependent on the
number of plants - the higher the number of plants in an area, the lower the cost per plant.

Any losses from previous rounds are carried forward as per the "loss carryforward" principle. Thus,
even heavy losses may be evened out during later rounds, as future incomes incur lower taxation.
 Deferred taxes do not expire, e.g. potential losses made during the first round will continue to be
deducted from taxes until the losses are covered.

12.2. Balance sheet

Receivables and payables are automatically calculated as a percentage of sales and production costs.

Additional paid-in capital indicates the difference between share issue/buyback price and the face
value of the share.

Short-term loans are taken automatically if the company does not have enough liquidity to run the
operations.

Food for thought

Your goal in the simulation is to maximize the shareholder value. With this in mind, you
should aim to run the company with as small a balance sheet as possible, without
jeopardizing current profits and future growth opportunities. If you can generate the same
profit with a lighter balance sheet, you have utilized your assets more effectively and thus
need less money from investors.
13. Calculation of key financial ratios