Use the Finance area to determine the financial structure your company.
Companies need to first enter all decision data on the other spreadsheets before they can get an accurate projection of financial demands.
The year end Cash Position should be positive (that is, the number should be black). If the year end Cash Position is red, companies need to issue Stock, Bonds, or Current Debt (or some combination of the three) to cover expenditures.
As companies make decisions, the predicted Cash Position and debt to equity pie chart will update.
Finance also determines Accounts Payable and Accounts Receivable policies. Shortening A/R (accounts receivable) lag from 30 to 15 days in effect recovers a loan made to customers. Similarly, extending the A/P (accounts payable) lag from 30 to 45 days extracts a loan from your suppliers.
Finance Definitions
Plant Improvements Total Investments and Sales of Plant and Equipment Improvements and sales ordered in the Production area.
Common Stock
Shares Outstanding Number of shares of outstanding common stock.
Price Per Share The price of a share of common stock at the end of last round.
Earnings Per Share (EPS) Last year's net profits, divided by Outstanding Shares. EPS should serve as a reference for determining dividend amounts.
Maximum Issue and Issue Stock You cannot issue stock in your simulation.
Max Retire Upper limit of stock that can be bought back, in thousands of dollars.
Retire Stock Amount of stock to retire. Brokers charge a 1.5% fee to buy back stock.
Dividend per Share The total amount a company plans to pay this year for each share of stock. Dividends are paid in quarterly installments.
Current Debt
Interest Rate The interest currently paid on Current Debt. Your interest rate is a function of the prime rate and your firm's debt/asset ratio: The higher the ratio, the higher your Interest Rate.
Due This Year Debt that must be paid this year. Current Debt is paid on January
Borrow Amount of Current Debt companies choose to borrow in the upcoming year. If you wish to keep last year's level of Current Debt, enter the amount that appears in the Due This Year cell.
Cash Positions The Cash Position with last year's date is the same as the beginning Cash Position for the current round. The Cash Position as of Dec. 31 of the current round shows the projected position at the end of this round. It is taken from the Proforma Balance Sheet for the current round. A red number in the Cash Position cell indicates a shortfall is expected, and the company will need to turn to the capital markets. Failing to cover shortfalls will result in an Emergency Loan with an above-market interest rate.
Bonds
Outstanding Bonds
Series Number Label given to a bond when it was issued. The first numbers are the interest rate. S means series, and the last four digits refer to the year the bond is due. 15.4S2008 means that the bond pays a coupon 15.4% each year and that the principal is due in 2008.
Face ($000) Principal of the issue. If the face is $11,040, then $11.04 million in bonds were issued. Using the 15.4S2008 example, coupons of 15.4% or a total of $1,700,160 will be paid each year until the bond becomes due in 2008. In 2008, the last coupon and the principal are due. The principal is converted automatically to Current Debt on December 31 of the year it is due.
Current Yield A measure of what the bond is worth at current interest rates. To calculate, the stated interest rate is divided by the closing bond price. For example, if the stated interest is 15.4% and the closing price is $115.80 then $15.40 divided by $115.80 gives a yield of 13.3%.
Closing Value Closing price of the bond last year. Bonds are bought and sold in the marketplace, but since their interest payment is fixed, the price of the bond fluctuates. A bond rating is made for each firm, ranging from AAA (best) to D (worst). For each lower grade, investors expect an additional 0.5% yield. The spreadsheet adjusts the closing price of the bond so that the yield reflects current interest rates and an appropriate risk.
Long Term Debt
Retire Long Term Debt Face amount of the bonds you wish to retire. Oldest bonds are retired first. Bonds are bought back at their street price. Brokers charge a 1.5% fee to retire bonds before they mature.
Issue Long Term Debt Face amount of the bond your team wishes to issue. Bonds are due in 10 years. Banks refuse to give credit when debt/assets exceeds 0.8. Brokers charge a 5% fee to issue bonds.
Long Term Interest Rate Interest rate companies pay on new bonds. The interest rate is a function of the bond rating and the current prime rate.
Maximum Issue This Year Upper limit on the amount of long term bonds that can be issued this year.
A/R Lag The Accounts Receivable Lag (in days) is the time between customers receiving products and when they are expected to pay for them. If companies offer no credit terms, demand falls to about 65% of normal. At 30 days, demand is 95%. At 60 days, demand is 98.5%. At 120 days, demand is 100%. The longer the lag, the more your cash is tied up in receivables. Take note of the Unit Sales Forecast numbers as the A/R Days are adjusted. Increasing the days creates more favorable terms for the purchaser, and the forecast increases.
A/P Lag The Accounts Payable Lag (in days) is the time between companies receiving material and when they are expected to pay for it. Increasing the lag improves your cash position since you are in effect getting a loan from your creditors. Suppliers get upset as the lag increases and withhold material for production. At 30 days, they withhold 1%. At 60 days they withhold 8%. At 90 days they withhold 26%. At 120 days, they withhold 63%. At 140 days, they withhold all of your material. Take note of the Production After Adj. numbers in the Production area. Increasing the A/P days creates less favorable terms for suppliers, and the Production After Adj. number falls.
The Finance area’s December 31 Cash Position includes all of your projected cash inflows and outflows this year. This includes (as an outflow) current debt that’s due this year.
The December 31 Cash Position also displays as the proforma balance sheet’s Cash Position. Cash reflects the amount left after all company payments are subtracted from the sum of:
Forecasts are used by the proformas to calculate financial projections (see “Proformas & Annual Reports” in the Guide section). If you enter a forecast that is unrealistically high, the proformas will take that forecast and project unrealistic revenue.
Sales Revenue on the Proforma Income Statement
On the proforma income statement, sales revenue for each product is based on its price multiplied by the lesser of either:
When a forecast is less than the total number of units available for sale, the proforma income statement will display an inventory carrying cost. When a forecast is equal to or greater than the number of units available, which predicts every unit will be sold, the carrying cost will be zero.
Tip: The simulation charges a 12% inventory carrying cost.