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FORAD Multinational Business Finance Simulation
Business School Course
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Agenda
2
Executive summary
Why use this product?
The FORAD simulation: FORAD company structure and details Decisions process Share price calculation Simulation process Reporting and reviews
The FORAD company decisions - details
Learning points
The FORAD simulation – management and logistics
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Summary - what is the FORAD simulation?
3
The FORAD BUSINESS FINANCE SIMULATION is a computer based game designed to help the students, usually in teams of 3 to 6, understand what it takes to manage the financial and operational challenges of a multinational corporation. The company operates in a challenging market environment and competes with the rest of the FORAD companies.
The management of the company involves DECISIONS in the areas of forecasting, operations and budgeting, choice of financing options, risk management and international taxation strategies, shareholders’ relationship. The focus is on corporate finance decisions.
The teams’ PERFORMANCE is measured by the company’s share price which depends on the earnings per share achieved and a combination of a number of performance measures which include credit rating, success in risk management, effective tax rate, quality of earnings, other.
The performance depends on the users’ ability to understand the key corporate finance concepts and apply those lessons in managing a complex organization in competitive and unpredictable MARKET ENVIRONMENT – subject to the simulation
The software provides the users with detailed REPORTING and a number of other DATA TOOLS to help their decisions and review processes.
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How does this product improve the course?
4
The simulation presents multiple key finance concepts (capital structure, capital costs efficiency, operating analysis, capital budgeting, valuation are just examples) and therefore is suitable for a wide range of traditional finance courses.
Regardless of the course focus, it allows the users to also see “the big picture” about managing multinational corporation and examine how certain decisions affect multiple areas of the company.
It challenges the users to address variety of trade-offs – equity vs debt financing; ST vs LT debt; conservative versus aggressive risk management are just a few of many.
The game format replicates the real world and adds another layer of complexity to the learning experience – unpredictability of the market and the competitors’ behavior.
It gives the users the chance to experiment with their decisions and try unlimited number of combinations and iterations to test the lessons learned in the classroom.
WHAT
HOW
The FORAD simulation makes the course more effective by teaching important lessons , further enhanced by the way the learning is delivered:
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How does this product help the instructor?
5
The FORAD company structure and the simulation performance and results could be used as semester-long case for class discussions.
Adjustments to established course schedule are not a requirement and depend only on the instructor’s preference – the FORAD simulation could be simply an addition to the class and the learning points focus could be aligned with the class objectives.
The addition of the FORAD simulation does not require major time investment to advise the teams – the players’ manual includes all details needed. If requested, interpretation of the results and other supporting materials can be provided by the Tower46 teams.
The competition element increases the students’ engagement and interest in the class. Performance in the simulation can be used as additional objective assessment of the students’ success in understanding the course material.
Additional benefits for the course instructor:
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The FORAD simulation – details
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The FORAD Company structure
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Banks: LT/ST loans; FX hedging instruments
Shareholders: Equity;Dividends
Clients:Domestic sales; International sales
IC loans and dividends
IC trade
U.S. Holding Company
Japan Operational Subsidiary
Germany Operational Subsidiary
Banks: LT/ST loans; FX hedging instruments
Banks: LT/ST loans; FX hedging instruments
Clients:Domestic sales; International sales
IC loans and dividends
Consolidated FORAD
Company
IC: Inter-companyST: Short-termLT: Long-term
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Decisions process
Multiple steps, but no formal flow or limit for the desired iterations
Preparation - analyze company’s results, study competitors results; forecast the market data; set goals and plan the current period
Operations – decide capacity and production levels, looks for ways to improve revenues and profitability
Financing and investing – review the company needs or excess resources; borrow or repay debt, decide on maturity and currency, issue equity or buyback shares
Review – examine expected results, stress test for unexpected market data, think for ways to increase EPS and/or PE score, adjust the decisions
Tax management – search for opportunities to lower corporate tax rate – via IC loans, transfer pricing, IC dividends
FX management – review the exposures and decide on the hedging approach
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FORAD simulation process
9
Team 1 Decision
The teams submit their decisions files to the Administrator
During the simulation, the teams’ predictions for market data are replaced with the market actuals and teams’ results are recalculated
Team 2 Decision
Team N Decision
The teams receive their final results with complete detailed reporting package and can proceed with the next period decisions
The teams also receive companies’ rankings, selected data for the competitors and economic commentary forecast for the next period
Next period forecast
Industry summary
Team 2 Results
S I M U L A T I O N
Team 1 Results
Team N Results
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The FORAD company share price calculation
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Share Price = Annualized Earnings per Share x Current PE score
Credit worthiness,
30%
Currency hedging, 20%Planning skills,
10%
Tax management,
20%
Dividend management,
10%
Quality of earnings, 10%
PE score elements, description and weights:
Credit worthiness Debt/Assets ratio; debt maturity; credit rating; interest expense
Currency hedging FX gain or loss compared to conservative hedging approach
Planning skills Ability to predict market data and company's results
Tax management Effective tax rate for the consolidated company
Dividend management Corporate dividend compared to earnings; consistency
Quality of earnings Size of non-core earnings; total earnings volatility; dilution effect
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Reporting
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The model automatically generates multiple reports:
For the competitors and the industry:• Share prices, EPS, PE scores by company• Operations and production highlights• Consolidated financials of the competitors • Market data and forecasts Individual teams’ detailed results:• Financial statements by subsidiary in local
currency and in USD• All current and historical decisions and results by
position – FX exposures and results, borrowings and investments, productions data, tax management
• All reports are downloadable in Excel
6.00
9.00
12.00
15.00
18.00
P1 P2 P3 P4
T1
T2
T3
T4
T5
T6
$50
$100
$150
$200
P1 P2 P3 P4
T1
T2
T3
T4
T5
T6
PE scores by team by period
Share prices by team by period
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Decisions and results review tools
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Historical Reports
Decisions Details
Stress Tests
Excel Downloads
At any time - access to the team’s historical decisions and results with all details included
Includes operations, financing, hedging, taxes, PE
score elements, financial statements by subsidiary
and consolidated
All reports can be downloaded in Excel and analyzed as desired or be a base for other independent modeling and reviews
The model offers multiple tools for the users to review their results to enhance the learning experience
The users can enter extreme values for market inputs to explore the effects and test
the decisions’ quality in such cases
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The FORAD company decisions
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Operations decisions
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Even though the FORAD teams have limited opportunities to influence the sales levels, operations decisions are crucial for the company’s profitability. Some decisions affect the company’s performance over long-term, others have immediate effect.
Long-Termeffect
Develop long-term strategy for capacity investments – given the trade off between having enough capacity on time and the cost of funds to purchase it
Decide how much to produce the current period to meet the demand, but also whether to build inventory for the near future to minimize the costs
Decide on each period’s collection and payment terms to optimize the revenues and the cash needs. Decide on the collection currency and Inter-company trade details.
Mid- Termeffect
Short-Termeffect
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Japanese subsidiary US Holding Company German subsidiary
Equity; LT/ST loans; Swaps; Marketable securities
IC loans
LT/ST loans; Swaps; Marketable securities
IC loans
Financing decisions
15
Cash needs: Based on the operational decisions and predictions, the model estimates the cash needs by subsidiary on a few key days within the period – day 0, 30, 45, 60 and 90.
Available capital and investments: • Debt - fixed and floating rate Long-term (LT) loans in the subsidiary local currency; Short-term (ST)
loans in all three currencies; Inter-company (IC) loans in USD• Equity - the Holding company can issue equity from the shareholders and repurchase shares• Swaps - the teams can enter into plain vanilla interest rate swaps for their LT debt positions • Marketable debt securities – the teams can invest excess cash in marketable debt securities
Effects: These decisions affect corporate structure and credit worthiness, interest rates management results, FX exposures and effective corporate tax rate.
LT/ST loans; Swaps; Marketable securities
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Foreign Exchange Hedging decisions
16
Foreign ExchangeExposures
Foreign ExchangeHedging Instruments
Foreign ExchangeResults
Given the operational decisions, the teams can review the FX exposures by type, by subsidiary and by currency:• Trade exposures –
receivables and payables
• Financial exposures – ST and IC loans
• Exposures from IC dividends
Hedging instruments available:• Forward contracts• Options contracts• Operational and
finance decisions to adjust the exposures
Both hedging and speculative positions are allowed.
The model calculates expected FX gains and losses by position:• From the underlying
exposures• From the hedging and
speculative positionsThe gains and losses are based on the teams’ predictions for the period end FX rates.
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Tax management decisions
17
Transfer Pricing
Inter-company Dividends
To optimize the corporate effective tax rates, the FORAD teams take decisions on three main items:
Inter-company Loans
Minimize the subsidiaries income tax rate by paying Inter-company dividend to the US Holding company at the optimal payout ratio. Minimize the net foreign tax credits and deficits.
Influence the profitability of the two operational subsidiaries with different income tax rates by changing the transfer price for the Inter-company trade relationship, the currency of invoice and the pay terms.
Another way to influence the subsidiaries’ profitability – by using Inter-company loans to transfer funds within the company and charge the best from tax perspective rate.
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Learning points
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Learning points – Finance skills
19
Risk management Identify, understand and manage risk exposures – those resulting from volatility in the foreign exchange rates, interest rates, commodity pricing
Use economic commentaries to develop market forecasting process Learn how to use various hedging instruments and structures
Corporate structure and capital markets
Define corporate structure and manage credit worthiness Choose between multiple sources of capital available – equity capital, short-
term and long-term fixed and floating rate debt Refine the details – currency, duration, type, risk profile Learn to evaluate the strategy and how to adjust, if needed
The FORAD simulation allows the users to build skills in multiple areas of corporate finance – very helpful for any well rounded finance professional, and therefore, crucial for
success at the work place
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Learning points – Finance skills – continued
20
Financial planning and analysis
Use market data to forecast the sales and structure company’s operations accordingly
Manage the company budget for long-term assets (capacity) and med-term assets (inventory)
Understand the long-term effects and plan beyond the current period
International taxation
Learn about the differences in the local tax rules ad rates Test the various tools available to a multinational corporation to achieve
better tax efficiency
Financial statements analysis
Learn how to read and explain the numbers after they have been already generated
Get the opportunity to review the historical results and examine the trends
Competitors’ analysis
Learn how to use limited publicly available data for the competitors to draw conclusions for their strategy ad make adjustments to be more competitive
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Learning points – Managerial and Organizational skills
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Management Skills
See the big picture about managing a complex organization and how certain decisions effect other areas too
Acknowledge and manage trade-offs and learn to prioritize and focus Learn to evaluate performance, identify mistakes and recover Accountability – take ownership of the decisions and defend them to the
public, develop and follow internal rules
Organizational Skills
Time management – deadlines in FORAD are similar to the deadlines in the real world and require tight organization
Team dynamics – success in FORAD is nearly impossible without effective team with quality discussions and team commitments
Communication skills – learn to communicate and negotiate within the team, but also when presenting the company’s decisions and results
The FORAD simulation also allows the users to build skills in areas outside of corporate finance – to complete the overall training experience
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The FORAD simulation – management and logistics
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Performance assessment
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+Written reports: • Allows the teams to review and analyze their performance again and reflect on the
lessons learned. Could be structured similarly to US public company regular filings to practice reporting skills .
Presentation and Q&A session with a panel of judges (other instructors, professionals):• Further enhances the learning power of the game; the event could be open for
everybody interested and increase the course popularity and the students’ visibility.
1
2
3+
Highest share price at the end of the simulation: • Highlights a team with solid profit and also success in the majority of the PE score
elements. Other benchmark are an option too – market cap, specific element of the PE score, FX results, only operating profit or only non-operating profit, others.
The competition gives the instructor multiple tools to objectively rank and evaluate the students’ performance. All are optional and could be customized.
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Suggested simulation schedule
24
FORAD simulation game could be run along side a semester-long course:
Stage 1 - pre-game and first decision (2-3 weeks) – form teams, distribute the players manual and allow the teams to get to used to the software and the rules when preparing their 1st period decision
Stage 2 – core game (6-7 weeks) – allow a week for each period decision Stage 3 – final results and debrief (2-3 weeks) – distribute the final results; allow the teams to prepare
their final reports, presentations and decisions defenses, if used
Stage 3
Prior to the game Week 1 of game Week 2 of game Ongoing…. Last week of game After the game
Form teams, distribute manual,
install modelTeams work on
period 1 decisionPeriod 1 results and
commentary-----
Teams work on period 2 decision
-----Priod period results
and commentaryTeams work on last
period decisionFinal results and
debrief
Tower46 team provides interpretation of the results, answer questions, other finance or techincal support
Stage 2Stage 1
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Responsibilities
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Class Instructor: Primary contact for the students - form
teams, distribute the materials, answer questions
Post each period results Evaluate the teams’ overall
performance Incorporate the learning points in the
course goals
Tower46 team: Technical support Support for all financial calculations
and assumptions used in the model Training for the instructor and
administrator manual if used Help with the students’ questions, if
needed Recommendations and best practices
Class Instructor or Tower46 team: Administer the simulation process Create scenario for the simulation and the supporting
market commentaries Interpretation of each period results
Instructor’s choice
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Logistics and other details
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Possible game formats:• Semester-long course with decisions due weekly • Intense short course with decisions taken each day (usually for executive education) Teams and users - no fixed requirement for the number of teams or team members. 3 to 5-member teams offer good balance between work load and efficiency and 5 to 10 teams provide the best competitive environment. Length – the simulation could continue between three and 20 periods, ideal results are achieved between 5 and 8 periods. Location - the learning experience is most effective when teams discuss their decisions and results together, but they do not need to be physically at the same location and could work remotely.
Administration – could be administered by the course instructor (brief training would be needed) or remotely by Tower46 member. In all cases – interpretation of the results and help with any questions from the users will be provided by the Tower46 team. No specific technology requirements.
Documentation:• Manual for the users with all details to play the game; no additional training required • Manual for the Administrator, if needed • Ready to use market scenarios with economic commentary packages; customization of the
scenarios is an option