Pure Management

In simulation, your team owns no stock. You are pure Management.

Management has only one method to keep the wealth — retain the profits. Owners can take the wealth out two ways, via dividends and stock appreciation. Management argues against dividends by saying, "Let us keep the profits as Retained Earnings. We will grow the company and Owners will see stock appreciation." Owners listen. They are indifferent to the method so long as their wealth is maximized.

When a company becomes a cash cow, however, the argument that Management can grow the company becomes less persuasive. Assets stabilize. If Retained Earnings go up, Debt must fall and with it Leverage. Owners argue, "If the best you can do with our Retained Earnings is save the interest payment, a paltry 8% or so, we want to put our money into a better investment."

In the real world, Management might counter argue that they can diversify the company, get into new businesses, etc., but this addresses a different question, "What shall we do with the surplus now that the Leverage question has been settled?" Typically cash cows become wholly owned business units, and their managers serve one stockholder, the parent company. When you examine the cash cow's balance sheet, you find it features a healthy leverage — not too much, not too little, just enough to maximize the return to the parent.

The simulation differs from the real world in one important respect — you have an instructor, not owners, to worry about. Your professor may have allowed you to set your own performance measures. This puts a new spin on your situation. Owners and Management have somewhat competing agendas. You may have stacked the deck to favor Management.