Common Question Topics:

Bankruptcy
Credit Rating
High Production/Inventory Unit Costs
Interest Expense
Lawsuits
Miscellaneous Expense
NPV - Movement of
Order of Events in the Simulation
Other Paid In
Plant Hours - losing
Purchasing Plant Hours
Raw Materials Futures - higher than at market?
Repurchasing Stock
Repurchasing Stock or Dividend Issue, which comes first?
Second Shift
Special Loan
Stock Price - Movement of
Taxes - How are they determined

Recent Questions

How will my subsidiary affect my performance? At the end of the simulation the NPV of the subsidiary is merged with the NPV of the parent firm, see the calculation in the chapter on subsidiaries.

What is a wholesale order? Wholesale orders are orders placed with your firm through contracts. If you didn't make contracts with another firm, but have wholesale orders, check your executed contracts list for the quarter for more information. Wholesale sales are orders placed with your firm through contracts. Sales made on these orders are included in your total sales figure for the quarter.

What Affects NPV?
NPV measures the ability of the firm to create wealth for the stockholder over time. Net present value = present value (including stock and dividend value) less stockholder investment in period zero. For more details see: http://www.globalview.org/student_files/adv_files/txt_npv.htm

Can I sell back more than 10% of outstanding shares?
No. The simulation rules restrict you to 10% repurchase per quarter. Therefore, develop and implement a buyback plan now if you want to decrease your shares.

Which decision variables do I change and which do I leave in place each quarter? http://www.globalview.org/student_files/adv_files/txt_decisions.htm

My Market Share is TOO SMALL!!!
One thing to keep in mind when determining what your real market share is = contract sales from other firm in your market group. These may distort total market share, making it seem larger than in fact it is. Check out the link below to see what firms in your market group sold product to the wholesale market and how much.
Firm to Firm Contract Listing -- Also helpful to manufacturers calculating wholesale demand

I can't get my product moving!!!
Can't get your product out the door? You've got to have a good marketing mix (expenditures that are made over consecutive quarters in all marketing areas). Order a special report and check out your sales rep compensation in relation to other firms in your market group. Are you spending on QUALITY CONTROL? QC is an element of marketing, but because it is in the "budget" decision folder, it can get passed over. Pricing relative to other firms in your market group is also VERY important. Remember, markets are developing as firms grow and cumulative marketing expenditures for the market group add up. If you're only operating in one area, consider trying out other markets, the markets will grow differently as the simulation progresses (be sure you're reading "The Boss" to keep an eye macroeconomic trends).

Bankruptcy:  Bankruptcy has officially occurred when a firm's Total Equity figure on the balance sheet equals zero.  This means that the firm has lost all of their investor's money and are owned entirely by creditors.  Creditors will often step in at this time and seize assets, which will then be sold through bid process in contracts.  Bankruptcy notices are made public in "The Boss" (the simulation newspaper), after both the firm and the professor have been notified.
Solutions:  The best solution is, of course, early detection of the problem.  Monitor your firm's total equity figure each quarter.  Stock price usually indicates a problem, but is not always an accurate measure.  If your firm does go bankrupt, the best solution is to start over in a new firm; where, having learned from past mistakes, the team can begin in a strong position.  On special occasions AGV will offer a bankrupt firm a deal through Venture Capitalists.  You may request help from a venture capitalist if you feel you cannot escape bankruptcy and do not want to give up on the firm.  The deal made through the Venture Capitalist usually includes an exchange of cash, or the payment of debts, for a private off-line purchase of stock in the firm.  This does not always save a firm doing poorly.
Text Review: Total Equity /  Bankruptcy

• In order to purchase units from Peacock Industries in quarter 1, year 1, your firm has to take out a special loan. This is due to the fact that contract orders are put through prior to any other decision for the quarter.  This emergency financing has a large impact on your credit rating.
• In addition to emergency lending, most firms have a loss in their first quarter

These two factors taken together will often more credit rating close to or over a 3 in the first quarter.  You will probably never achieve a prime rate of 1 but you will, over several quarters of consistent earnings and good debt to equity figures, move closer to this rating.

Special Loan: Anytime you generate a special loan credit rating is affected dramatically. Even if your debt to equity ratio at the end of the quarter is sound, you may find that your credit rating is in bad shape if you had to take out a special loan during the quarter. This is something to consider when buying goods through contracts (which can often generate a special loan)

Text Review: Credit Rating / Contracts Run Time / Debt to Equity

Interest Expense: Students sometimes have difficulty calculating their interest expense.  Interest on the income statement consists of the following:

1. Interest on last quarter's Short Term Loan.  At the beginning of the simulation the rate is 2.3% quarterly, this goes up or down depending upon the firm's credit rating.
2. Interest on Beginning Special Loan (automatically given when a firm's cash falls below $10,000)  The rate is 9% quarterly.
3. Interest on Long Term Loan is paid in the quarter the loan is issued.  If a firm borrows $100000.00 in Q1, they will be charged interest for that loan in quarter 1.  At the start of the simulation the rate is 3% quarterly.
4. Interest on Bonds.  The quarterly charge is 2.5% per quarter.
5. Amortized Bond Discount.  The quarterly rate on the discount is 5% per quarter.

Probable Cause of Miscalculation:  The primary cause of confusion tends to be the interest on special loans generated through contracts.  Contracts occur prior to the main simulation.  This means, that if your team does not have cash to cover contract purchases, a special loan is automatically assigned.  When the main program is run next, this special loan is stated as a beginning special loan.  Thus, the loan is paid off during the quarter (given enough $ is generated) and interest is charged, yet the special loan does not appear on the Income Statement.  It appears on the Cash Flow report as a beginning special loan.  Recheck your calculations once more, being sure to include all interest.  Interest on Bonds and the Amortized Bond Discount are often overlooked as well.

Question: "Why doesn't interest expense on the cash flow match the income statement?"
Answer: The cash flow statement does not show Amortized Bond Discount interest because this is not a cash matter

Text Review: Contracts Run Time / Interest

Lawsuits: Most lawsuits within the simulation arise out of contract miscommunications.   Financial loss can be great for firm(s) of a failed contract.  You must have written proof of contract agreements.  AGV cannot rule on cases without proper documentation.  If a verbal agreement is made within a chat room, advise firms that they should request or send written documentation after the discussion is concluded.
Solution: Lawsuits should be referred to AGV.   AGV will assign a law office to handle your case. Hiring a law office will cost the firm money and time.
Text Review: The Rules and Regulations

Miscellaneous Expense: Students who keep a keen eye on their income statement often have trouble calculating their miscellaneous expense. Following is a list of the Miscellaneous Expense components:

1. Hiring new sales reps $12000 each
2. Hiring trainees $3000 each
3. Assigning trainees $3000 each
4. Transferring sales reps $3000 each
5. Cost of changing second shift $2000 for each 10% added or $1000 for each 10% eliminated
6. Administrator's charges
7. Purchase of special report
8. Contract gains and losses on the sales of raw materials and plant hours
9. Seller's contract commissions
10. Consulting Contracts

• Hiring new sales reps can be a problem if the team is not monitoring their sales reps from quarter to quarter.  Sometimes sales reps quit, if they are not receiving enough compensation relative to pay of other firms in the market group.  When this occurs a message to this effect appears at the bottom of the team's firm report.  Because the team must enter the total number of sales reps desired in their decision set, a new sales rep will automatically be hired if they are short.
• Administrator's charges will usually be announced to a firm, i.e. an award from a lawsuit etc... However, some firms forget to take this into account.
• Sale of raw materials or plant hours:  Most firms are not aware that when they sell raw materials or plant hours through contracts, they must account for any gain or loss on the original value.  This accounting occurs as a miscellaneous expense.  This is most often a point of frustration for students which sell plant hours cheaply in an effort to collect fast cash.
• Seller's contract Commissions (Fees):  Firms which sell heavily through contracts may be surprised by their miscellaneous charge.  This is because they have forgotten to figure in contract fees.  The seller always pays the fee on a contract.  Fees are as follows:

6%   on sale of finished goods
5%   on sale of raw materials
20% on sale of plant hours
2%   on consulting services
20% on plant hours transferred between areas
3%   on raw materials transferred between areas

Other Paid In:  Other Paid in is an account on your balance sheet.  The most commonly asked question is, "What does the account consist of?"
Answer:  When you sell stock $1 per share is recorded in the "Common Stock" account.  Any excess over $1 is recorded as "Other Paid In".   A repurchase of stock also has an affect on this account.  A repurchase reduces "Common Stock" by $1 and also reduces "Other Paid In" by an average of paid in capital per share.
Text Review: Other Paid In / + or - Common Stock Decision Variable 

Plant Hours - losing. A common question for manufacturing firms is "Why am I losing so many plant hours each quarter and what can I do about it?"
Answer: Plant hours are lost through inadequate maintenance budgets. Poor maintenance over time has cummulative impact upon your plant. Hours cannot be recouped once lost but must be rebuilt. If you run a second shift you need to consider this in your maintenance budget. Your industry specific chapter can give you an idea of what you should be spending for maintenance on your plant. If you do find large losses occuring immediately overcompensate in the following quarter and thereafter until losses come under control.

Text Review: Scent Idustry - Maitenance / Maintenance Decision Variable

Purchasing Plant Hours:  Plant hours can be purchased from other firms through Contracts.  If a firm goes bankrupt, the assets of the firm, including plant capacity is often put up for bid.  The most commonly asked question concerning a purchase of plant hours is, "Will these hours be available for production in the same quarter they are purchased?"
Answer: The answer is yes, unless you are otherwise notified by AGV administrators.
Text Review: Contract Decision Entry

Raw Material Futures: The most fequently asked question is, "Why does the report show Futures prices listed as higher than at market prices?"
Answer: You are comparing the wrong numbers. You should be looking at last quarters future prices and comparing those against this quarter's at market prices. Futures raw materials are always less than at market prices in the coming quarter.
Text Review: Raw Materials

Repurchasing Stock:  Teams are restricted to a 10% per quarter repurchase of outstanding shares.  This limit is only lifted if AGV administrators have made an error.  The limit is in place to ensure that firms do not play end of the game strategies just to increase NPV ranking.  The same is true of dividend issues which are limited to a $.50 increase per quarter.
    The question most often asked by teams which repurchase stock is, "Why did our repurchase cost us more/less than our ending stock price of last quarter?"  In other words, why did the price vary, why wasn't I able to predict exactly what the repurchase price would be?  The second question most often asked is, "Why didn't our stock price increase with the buyback?"
Answer:  The program uses the closing price of last quarter and simulates an immediate buyback of the stock at the beginning of the quarter. Therefore, in almost all cases the repurchase price is the last quarter's closing price plus a premium.  The closing price for the quarter in which the repurchase was made depends upon the trend in earnings per share and the debt to equity ratio.  We advise that teams check their debt to equity ratio to see whether it is above 1/1.  If so, then the team is placing shareholders in a more risky position and decreasing the value of the stock.
    Buying back stock is not a guaranteed way to increase stock price.  If a firm goes into debt to repurchase stocks, shifting their debt/equity ratio too dramatically the stock may actually fall in value.  Please refer to the discussion on stock price below.

Question: Order of dividend issue versus stock issue/repurchase
Answer: Stock repurchase or issue happens first. Thus, you will be paying dividends on the number of shares after your new issue or repurchase of shares for the quarter.

Text Review: Earnings per Share / Capital Structure / NPV

Second Shift:  A second shift is a night shift which uses the same physical plant as the day shift workers.  The questions most commonly asked concerning a second shift are: "Is the second shift available for use in the same quarter it's added?" and "Can the second shift be increased more than 100%?"
Answer:  The Second Shift is available in the same quarter your firm makes a decision to add it.  Note that there are costs involved in hiring a second shift and also in firing a second shift.  A second shift cannot be increased more than 100% of the day shift.  You're are limited by the size of your plant.  Second Shift workers will work, as does the day shift, until 125% of normal is reached, at which time excess scheduled production will automatically be handed out to subcontractors who are very costly.
Text Review: Capacity Decision Variables / Second Shift / Overtime and Subcontracting / Stage 1 and Stage 2

Special Loan: Special loans can be very painful for teams.  With an interest of 9% quarterly, it can be hard to escape the effects.  The two questions most often asked are, "Where did this loan come from?" and "How can I get rid of it?"
Answer:  Special loans are generated automatically whenever a firm's cash balance dips below $10000.  Contract purchases often create a surprising special loan, especially if the firm in question has not had a great deal of experience in making contracts.  Because contracts go through before the main simulation runs, there is often a cash shortage as firms stock up with goods prior to seeing the inflow of sales revenue.  Over scheduling production can also cause cash shortages, if subcontracting occurs.  Units produced, in this case, can be more costly than the sales price.
     In order to pay down a large special loan a firm should consider becoming more liquid.  Review the income statement.  Perhaps cuts in expenditures can be made.  Factoring receivables can also help.  Selling assets through contracts is another option, if your firm has too many plant hours, too many raw materials, or units of product, etc... in stock.  AGV can sometimes help to facilitate such a sale, if the situation is desperate.  Issuing more stock may also be an option, or taking out less costly loans.  If you feel the firm has little or no chance of climbing out of debt, seek assistance from AGV.
Text Review: Interest on Special Loan / Contract Special Considerations / Factor Receivables Decision Variable / Factor Cost / 

Stock Price:  The question most commonly asked about stock price is, "How is it modified?"  What determines its movement?  Firms with an excellent quarter or two of earnings may wonder why their stock is moving up so slowly.
Answer:  Stock prices are determined through an intrinsic model, that is by a set of statistics as opposed to the setting of prices by supply and demand for shares in the market place.  Share price is driven by what was (the history of the firm) and what is (current analysis of the firm and the financial environment). There are 2 powerful ratios that dominate the share price calculation:

1. Current debt/equity ratio but only if it exceeds 1-to-1, as it will draw down share price as the ratio increases.  This ratio is a proxy for financial risk in a firm's capital structure.
2. Earnings per share (EPS).  Firms with more shares must produce more earnings in order for the stock price to remain equal with firms that issue fewer shares.  A firm with fewer shares but the same amount of capital (secured in part through debt) will find stock price to be more volatile since earnings and losses will be magnified over the fewer shares.  Firms with all equity (no debt) will have little chance of bankruptcy and little chance of being in the top stock performers.  EPS history is very important variable in stock valuation and caries a significant weight in the current + historical EPS analysis. One quarter's sudden change in EPS will not suddenly boost or radically damage share price.
       

Other ratios, such as credit rating and market share changes have minor affects on stock price but could have longer term impact on EPS which will have a direct impact on share price. The movement of the stock market index can have some impact. As the index remains stable there is little influence. However, as the index fluctuates, the larger the impact and the larger the weight in the total stock price determination.

Question: Why did our stock price barely gain on our competitor when we had over $1.30 earnings per share advantage this quarter
Answer: It is possible that a team will post a $-.14 EPS in one quarter. Another team in the same quarter will post a $1.23 EPS. What will happen to stock price? Students expect the $-.14 EPS firm to collapse in price and the $1.23 EPS firm to skyrocket. However, both firms are pulling all their history with them to be used in predicting future earnings which sets stock prices. The more recent history is measured to be more important but historical EPS also contributes. Thus, the low EPS firm may only have a $.01 decrease in its share price due to its excellent history and the $1.23 EPS firm (if it had a more volatile and poor record) may only have a $.02 increase in share price. The simulation is biased, as in real life, to pay a stock premium for solid and consistent growth in earnings with few surprises.

A good strategy to raise share price is to repurchase shares, GIVEN the firm has sufficient cash to buy back shares at the know reported price plus a premium, and a debt to equity ratio that can withstand a large reduction in the equity section.  Thus, only strong and financially healthy firms can effectively enact such a strategy.  Dividends would also follow a similar strategy.  Dividends carefully administered can raise share price and at the same time, directly add value to the shareholder as measured in the NPV ranking.
Text Review: Earnings per Share / Debt to Equity / Credit Rating / NPV / Capital Structure

Taxes: The most frequently asked question is, "How are taxes calculated?"
Answer: Taxes, in general, are around 48% of net income for the quarter. The first $20000 is taxed by 22%. Losses in any one quarter carry forward indefinitely.

Text Review: Income Taxes