TABLE OF CONTENTS

The Simulation: an Introduction | Vision and Corporate Design | Decision Variables | The Contracts Program
The Market Reports | Firm Reports: Credit, Sales & Production | Firm Reports: Financial Statements
The Scent Industry | Plant and Location  | Subsidiaries | Bankruptcy | Forecasting Demand | NPV | Broker

This brief chapter will instruct firms wishing to open subsidiaries. Most firms in the simulation will have enough to do without thinking of expanding to include another firm. There will be, however, those firms with enough talent and ambition to branch out. The option to open a subsidiary allows a team to strengthen its firm by starting a second firm in another market group. The opening of a subsidiary is subject to professor approval. Without authorization firms will not be allowed to own a subsidiary.
 

Please review AGV's Subsidiary Policy

A subsidiary occurs when a firm creates a new firm in another market group. Your firm, called the parent, owns 51% of the stock of the new firm. The other 49% of the stock must be made available to the public. A parent firm is not allowed to open a subsidiary in its own market group. A parent firm may only open one subsidiary during the course of the simulation.

The parent must make payment for 51% of the subsidiaries' stock issued in the quarter first subsidiary decisions are made (payment = shares issued X sale price per share X 51%). This amount is taken out of cash, AR or creates a special loan after the quarterly run. A confirmation of this transaction should be sent to your firm, as there will be no record on the quarterly report.

The parent firm has the right to 51% of any dividends. Note that cash from dividends issued does not come into the parent firm until the following quarter.

To make more money. To diversify the risk of operating in just one market group. To transfer knowledge gained from operating in one market group to another. To take full advantage of Contracts. To allow team members to become more independent.

There are disadvantages as well. The work load sometimes more than doubles for the team. The team must develop new methods of communication, responsibility and control. There will be a sudden and substantial loss of cash in the parent firm which might impact on its stock price. There is a risk that the earnings per share and/or the dividends per share in the subsidiary will fall below expectations.

Submit a report to your instructor which at minimum contains the following information:

1. Parent firm name and number.

2. Which quarter you will make your first set of decisions. Payment is due at the end of this first quarter.

3. A vision statement for the subsidiary.

4. Inform AGV administrators upon receiving professor approval for new subsidiary.

How a Subsidiary NPV affect the Parent's NPV

When the subsidiary closes, or when the simulation comes to an end, it is necessary to merge the value of the subsidiary with the value of the parent firm. This ensures that proper effects of the subsidiary are applied to the parent firm. It also ensures that teams do not simply open a subsidiary in order to bleed it do death.

Calculation:

Subsidiary NPV x 51% = Y

Subsidiaries Number Shares/ Parents Number of Shares = Z

Y x Z = Change to Parent's NPV