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 chapter will assist you as you form your team and begin to design your firm. There are four defining documents your team should create for the firm: the Vision Statement, the Mission Statement, the Statement of Ethical Standards and the Executive Contract. This chapter will explain what each of these documents is and help you in writing your own. Important operational questions, such as capital structure, will also be examined.

The team is the heart of the Global View firm. This core group of executives will determine the look and drive of the company. Your team may be hand picked or it may be assigned. In either case, you will have a collection of differing view points which must be brought into focus if you wish to achieve success.

Your team should decide early in the simulation upon scheduled corporate meetings. These may occur before or after class, or at any predetermined time. Your first meetings will be organizational in nature. You will need to determine vision, strategy, responsibility and other important basics for the firm.

Use these initial meetings to set standards for professional conduct and open discussion. This will be helpful as the simulation applies more pressure to the team and individual executives threaten to buckle.

Human resource management will be crucial throughout the simulation. Talk about your academic strengths and weaknesses. Discuss how decisions will be made, who will handle analysis, decision entry, accounting, marketing and so forth. Will you share all responsibilities of the firm. If so, how? Will you focus on each executive's strengths or rotate tasks independent of knowledge? How you share the work of the firm is of great importance. Likewise, it is necessary to have a way of determining how well this work is being done. Take a close look at the Executive Contract. This document should be the culmination of your efforts to organize the management of your team.

As you begin to define your corporation, you should set down, in writing, some of the goals and procedures of the firm. There are four documents in particular which will be very helpful to your firm (whether or not they are required by your professor); the Vision Statement, the Mission Statement, the Code of Conduct, and the Executive Contract.

Along with these documents, there are some important operational questions to consider. Where will you place yourself in the distribution channel? Where will you place yourself in the market? Will you build a factory? What will your assets and liabilities look like?

The Vision Statement is the primary defining document of the corporation. It is often used by instructors in the evaluation of the firm's performance. This document should be a collaboration of all the team members. A team united behind a clear vision will wield more power than a team which struggles to move in different directions.

The Vision Statement may or may not be required by your professor. It may have a great deal to do with your final grade, or it may not be included at all. In either case, the Vision Statement remains a key component to the design of your firm. It will help to provide direction as you move forward. Keep in mind that the Vision Statement may be modified over time as your firm gains a deeper understanding of the simulation's possibilities. You should also keep in mind the methods your professor will use to evaluate your firm's results.

There are many management texts which will help you define what a Vision Statement is. To be of value, the vision should be written in such a manner that its success can be measured. Examine the following two examples.
 

Example 1: We intend to be positioned in all markets with all products such that we control, on average, 20% of the market share. Our stock price will have doubled by the end of the simulation.
 

Example 2: We will be first or second in our market group, in terms of market share, profitability (as measured by ROA and ROE) and stock price. On the same measures, we will be in the top 10% of all firms across the industries.
 

The first statement appears to be more specific. In fact, they are both very specific. In each case, the team and the instructor will know to what degree the corporate vision was met. The first vision is defined in absolute terms, and the second vision is defined in measurement terms that are relative to those achieved by other firms.

There is one very important topic which will naturally be discussed as you work to create your Vision Statement. How much risk are you willing to take? Some students will find that they are quite conservative. They would prefer to set moderate goals and work to achieve them through safe methods. Others will be natural risk takers. They will want to ride the firm to its upper limits. The risk taker might push for a Vision Statement much like the following: "We begin the best, we will remain the best. We will finish the best, no matter how you look at us, no matter who you compare us to - We are number one."

This is a risky vision which will require risky action if it is to be reached and maintained. You will have to be vigilant in keeping ahead of the competition and take your steps before all the information is in.

Discuss the risk factor thoroughly. If there is one member of the team who is at complete odds with the other executives, he or she may want to seek out another team. It may be difficult to resolve future differences if this odd teammate does not accept the final Vision Statement.

Note that the two Vision Statement examples given above do not mention the firm's ethical values or its relationship to employees, customers, the environment, and other stakeholders. This is due to the fact that the vision statement is not generally held out as a document for public consumption. The Vision Statement is the focal point for top executives who possess the information necessary to create strategy and make decisions based on the vision.

What document, then, will the public, middle management, investors and other stakeholders look to for direction? The Mission Statement.

The Mission Statement works to bind the entire corporate staff into a directed and well run team. The mission statement should guide the actions of employees in a consistent manner.

As with the Vision Statement, a Mission Statement may or may not be required by your professor. It will, nonetheless, aid your firm in defining itself.

A Mission Statement may be specific and relate to a customer group or product quality. It may be more philosophical in nature, stating the purpose of the firm or providing ethical or moral direction. Examine the following two examples:

Example 1: This firm will set the industry standard for on time delivery of the best quality product available in any of the markets we serve.

Example 2: When product is needed, our quality product is there - no excuses - just an unfailing promise to deliver on time.

Besides the Vision and Mission Statements, your management team will need a statement regarding the firm's ethics. It could be a lengthy creed or a series of simple, concise statements aimed at each set of stakeholders.

All firms are required to have a written statement of ethical standards for the firm. This document must be made public if the firm has a website, kept on file with the company, or held by the instructor. This documentation must be produced in a timely manner when requested by your professor, AGV administrators, or any other participant in the simulation.

All team members are expected to understand and follow the stated ethical standards of the firm.

Individuals or firms reporting violations of ethical standards must provide documentation to their simulation administrators.

In the case of violation of stated ethical standards on the part of the firm or any individual in the firm, AGV will make public this violation in "The Boss" and through public posting boards. In addition, the firm is expected to make a public apology.

It is hoped that the market will respond accordingly to such news release

As with the Mission Statement, your firm's Statement of Ethical Standards will assist your firm's formation. Discussion on the following questions and others will help executive's understand their fellow teammates and provide a basis for drawing up the statement.

1. Are you willing to do whatever it takes to meet the vision?

2. Would you be willing to knowingly risk or damage employees and\or the environment if it were profitable to do so?

3. Would you be willing to spend significant amounts of money to protect employees from potential work hazards, even though the law did not require it?

4. If you gained access to a competitor's information, would you use it to damage that firm?

 

The final document which should be drawn up by the team, as you organize your corporation, is the Executive Contract. The Executive Contract is used for peer evaluation. It should lay out specific determinants which will be used for evaluating individual executive performance. Professors are not always privy to the inner workings of the Firm. They will, however, more often than not, be interested to know how students within a team weigh one another's contribution to the final results. How professors use this information may differ. Some professors will not use team evaluations at all. Others will use them to parcel out the firm's final grade.

On rare occasion an exceptional firm will form in which each executive shares equally in the work and responsibilities of the firm. More often than not, however, different members of the team have a differing degree of commitment to the firm. One or two executives may carry an entire team. The Executive Contract should serve to objectively determine this imbalance and distribute more points, percentage, or salary (depending upon how your professor wants your ending values stated) to those executives who put in more effort.

It is the Executive Contract which provides team members with a concrete and exact method of determining individual contribution. It is your assurance that the work you do will be counted. Put some serious thought into creating an Executive Contract which will be fair and precise.

Consider the following Executive Contracts as you draw up your own:

Example 1: Each member of the team will be evaluated annually. In most cases, each executive will have a total of three such evaluations over the course of the simulation. Performance rating for each criteria is based upon an assigned scale.

Criteria

Overall performance ___

Attitude __

Contribution to achieving our vision ___

Specific criteria
• Attends all scheduled meetings ____
• Prepared at time of meeting ____
• On time to each scheduled meeting ____
• Expresses opinion ____
• Opinions are informed ____
• Listens to other members ____
• Willing to compromise ____
• Carries share of work ____
• Shares workload with other member ____

Summary

• Value of employee to the firm ____

  Example 2: The simulation is designed to pay the executive team $10,000 times the total number of members each quarter. A five member team will find a charge on the quarterly income statement of $50,000 under administrative expense. This provides the instructor the opportunity to have each team pay quarterly salaries. We recommend the use of the same form used in example 1 with the following adjustments.

Criteria

• Overall performance
• (Maximum award = $ 3000)     ________
• Attitude
• (Maximum award = $ 2000)     ________
• Contribution to achieving our vision
• (Maximum award = $ 2000)     ________


Specific criteria: $3,000 as distributed

• Attends all scheduled meetings____
• Prepared at time of meeting____
• On time to each scheduled meeting___
• Expresses opinion____
• Opinions are informed____
• Listens to other members____
• Willing to compromise____
• Carries share of work____
• Shares workload with other member____

Summary Total Quarterly Compensation is the average of the peer reviews $_____________     +    Bonus $_____________

Total Quarterly Compensation
$_____________

Salary Record for the Simulation:

Year 1
Q1,____, = $_________
Q2,____, = $_________
Q3,____, = $_________
Q4,____, = $_________
continue over life of simulation

Total = $_________

Each team has a quarterly administrative salary budget to allocate among the team members. If any team member earns less than $10,000 per quarter, the difference is then available to the team to be disbursed as quarterly bonuses. As a strategy to motivate above normal or above standard performance, the team might agree to reduce the maximum awards for the first three categories by $1,000 each. That would allow at minimum, on a five person team, $15,000 to be awarded for bonuses each quarter. Bonuses motivate employees monetarily and also through personal recognition for a job well done. Your firm's success is limited by your ability to understand and apply human resource management skills and concepts.

Once your team is formed and united behind a clear Vision Statement you are ready to ask the practical questions. You know where you want to be, now how do you get there?

Following is a list of questions which your team will need to discuss. They are examined in greater detail in the remainder of this chapter.

1. Where will you place yourself in the distribution channel?
2. Where will you place yourself in the market?
3. Will you build a plant? If so what size and where will you locate?
4. What will the capital structure of the firm look like?

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1. Position in the Distribution Channel

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To demonstrate let's take the following 3 firms, Firm 1, Firm 2 and Firm 3.

Firm 1 is a manufacturer with a factory in both Area 1 and Area 2. Firm 1 produces large amounts of finished goods which they sell to marketing firms (they may or may not use an agent) and to the consumer market.

Firm 2 is an agent, and has no factory. They work to bring manufacturing firms like Firm 1 in contact with potential buyers for a fee.

Firm 3 is a marketing firm. They have no factory but buy their finished goods from other firms and Peacock Industries to sell to the consumer market (through the retailer).
 

Firm 1

Firm 2

Firm 3

Retailer

Consumer Market

The Retailer is simulated, as is the consumer market. The Retail buyer supplies the end consumer.

Let's look at our three firms. Firm 1 has the option to sell through Firm 2 (agent) or direct to Firm 3 (marketing firm). The manufacturing firm also has the option to sell directly to the Retailer.

Firm 2 and Firm 3 have the option, assuming they have product, to sell to the retailer, as well as to other firms looking for product.

Firm 1 will assume added risks which the other firms do not since they have an investment in two large plants. At the same time, they do not run the risk of running short on product.

If you decide to become a manufacturer, you can remain as small as you like. You do not have to supply other firms with product. This is simply an option. Almost all firms will sell to the consumer market through the retail buyer. Only the best firms will tap all of the opportunities within the distribution channel.

If your firm decides to become a marketing firm, a large manufacturing firm, or an agent, it will become very important to familiarize yourself with the Contracts Program immediately. Making contracts is not easy. It will require negotiation, time and effort.

It is possible to change your place in the distribution channel after the simulation is under way. If, for example, you are a large manufacturing firm, and are having problems finding marketing firms who want your finished goods, you may opt to trim down, and focus on the consumer market.

As a distributor of finished goods, you will require product. How do you obtain product? There are a variety of options available to your firm (some of these will be review from the above discussion):

A. Manufacturing in your NAFTA plant (only one plant per area allowed; can be expanded)
B. Manufacturing in your EU plant (only one plant per area allowed; can be expanded)
C. Manufacturing in your subsidiary (contracts will allow one or two plants to effectively supply four different market areas)
D. Contract with other firms in your market group (they will be a direct competitor for retail market share; easier to negotiate if the firm is positioned in a different market segment)
E. Contract with other firms in other market groups (any plant in the NAFTA or EU might become a one time or long term supplier)
F. Contract with Peacock Industries (constant supply in early quarters, but too expensive and unreliable for the long run to use as your primary supplier; use first two quarters of simulation, and thereafter as supplemental source)
G. Contract with Peacock Industries for large scale bids (supply is erratic; bids occur throughout the simulation). Notice of bids is published in the quarterly newspaper,"The Boss".

Will you be a manufacturer? Produce some or all of your own finished goods? Make enough product to sell finished goods wholesale to other firms in the simulation? If you sell to other firms will you use an agent if one exists or make your deals directly? Is your decision consistent with your firm's vision? If not, should you revise your Vision Statement?

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2. Position in the Market

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The wholesale market (look at the distribution channel example above) is made up of other firms in the simulation which are looking for product. These firms may be marketing firms which look for all their product outside their own firm, manufacturing firms which cannot produce enough product to cover sales, or agents that work to move product from one firm to another for profit. All of these firm to firm sales must be made through the Contracts program and will require negotiation with the firm(s) involved.

Finished Goods sales to other firms will be included with backorders from the previous quarter and filled in the current quarter. In this way, they become a part of your current sales figure and will be included in your market share. Refer to chapter 6 for more details.

The consumer market is made up of individual consumers in two different areas, Area 1 (NAFTA) and Area 2 (EU). In each area you have the option to sell two different products, Product 1 and Product 2. As shown above, the product reaches the end consumer through a retailer. Both the retailer and the consumer market are simulated. Sales to the Consumer market (through the retail buyer) are recorded as sales for the quarter on your confidential Firm report. The program will automatically sell product for you to the consumer market if you have product in the specified area at a listed price.

Note: If you don't want the program to sell product for you do not set your price to 0. This will cause all of your units to be sold for $0.00. If you want to hold onto product for firm to firm sales, set your price(s) in the decision set higher than what the consumer will pay.

Which markets will your firm compete in? Will you tackle all of the markets, selling to other firms as well as to retailers in the NAFTA and EU areas? Will you focus only on Product 1 or will you sell both Product 2 and Product 1?

As you make these decisions you will need to refer to your specific industry chapter. The market research reports in your industry chapter will help your firm determine important details concerning product, demand, plant production, etc...

Actual market group demand will depend on the average price retail buyers find for the product in your specific market. That demand is enhanced by the amount of marketing effort made, on average, by all firms in your market group. The potential market might change over time as influenced by economic and external conditions. Read the quarterly news reports to monitor changes in market potentials.

1. In your first set of marketing decisions select or target a segment(s) of the consumer market: for example, product 1 buyers in area 1.

2. When results are returned determine if you hit target.

3. Look at the competition, were other firms in that segment? How tough will the competition be? Should you change strategies?

4. In the first two quarters gather as much market research information as possible on all products in all markets.

5. Always monitor competition, as more marketing effort can move buyers from one segment to the other even though price does not change (note overlapping of segment). Learning to live with a competitor is sometimes a better strategy than beating a competitor.

6. Be aware that existing firms might enter your market late in the simulation, or new firms might enter your market group. Remain aggressive with your marketing strategies, but not inflexible.

How will you position the firm in the market? Will you sell to other firms through contracts? Should you market two products? Should you market in one or two consumer areas? Are both areas equally important? Should you enter different markets all at once or devise strategies to achieve your vision for marketing over time?

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3. Plant Capacity

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To determine the size of your plant you will need to know how much of Product 1 and/or Product 2, you intend to manufacture each quarter. This will depend upon how you answered question 2 above (concerning your place in the market) and how you have written your Vision Statement.

Take, for example, a firm which has decided to become a large manufacturer of both Product 1 and Product 2. They intend to sell to other Global View firms as well as to retail buyers in both Area 1 and Area 2. Their Vision Statement has declared that they will be number 1 of all firms in the entire simulation.

A firm taking this course of action will want to construct a large factory in the NAFTA area as well as a large factory in the EU area. They will probably extend the productivity of their factory by taking advantage of overtime, a night shift and the addition of High-tech. They will also locate their two plants in low labor cost areas (Mexico or the Czech Republic) and\or take advantage of incentive offers. All of these options will be discussed further in later chapters.

Many firms will take a more moderate approach to plant capacity decisions. Perhaps you'll use an expansion strategy where two shifts are consistently used before an additional plant is added. This strategy is safer financially but leaves markets vulnerable to competitors. The larger, more aggressive firms with larger production facilities could preempt your firm from using a marketing cost strategy. Their larger plants will have a cost advantage for any large scale production. Thus, being safer may limit some of the firm's options.

Whatever your general decision on size, you will need to take out your calculator to determine the exact capacity. Chapter 14 will lead you through the process of forecasting demand. Your industry specific chapter will contain market research reports for Product 1 and Product 2. All of this information is needed to estimate demand for your firm's product. You will also need to look in your industry specific chapter to determine how many hours of labor (Stage 1 and Stage 2) it will take to produce 1 unit of product.

If you are going to construct a plant, where will you locate? Plant location is an important decision to make. Even if you do not have a plant you must register an office location with the Global View Administrators.

In the Global View Simulation you may build one plant in Area 1 and one plant in Area 2. Area 1 is NAFTA. Area 2 is the EU, including the Czech Republic. Locating in Mexico and\or the Czech Republic will carry risks and benefits not found in other Area 1 and Area 2 sites. If you do decide to locate in Mexico or the Czech Republic you will need to make an additional entry in the Contracts program. See the plant section for more details on locating in Mexico or the Czech Republic.

In NAFTA or the EU (and Czech Republic), you may locate anywhere you choose. All transactions, in both areas, are in U.S. dollars, except for compensation to EU workers who are paid in Euro Dollars.

Keep in mind, when choosing location, that political and environmental factors may affect your plant. Special incentives may be offered to firms at the start of the simulation for locating in specified areas. Read all available reports on these offers to determine if the site being offered carries additional risks.

A low cost marketing strategy would mean serious consideration of the higher risk sites. Hi-tech equipment which can be installed per factory at a fixed charge regardless of plant size would seem to favor one large plant versus two small plants. The greater the production capacity of a firm (one or two plants), the more stable will be the finished goods supply, which will support the marketing strategies. The greater the production capacity, the greater the need for funds to build the plant and to cover working capital needs for such things as raw materials. If the plant assets are not employed at their maximum, the return on the funds invested will deteriorate, decreasing the potential value of the stock. Thus, you need to match the marketing plan with your plan to secure finished goods.

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4. Capital Structure

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Two important finance questions now emerge. How much money will be needed for the first year of operations? How much should come from the sale of stock, from the issuing of debt, and from retaining the profits of the firm?

To determine the amount of capital needed to move your plan through the first year of operation, list your firm's most likely set of assets in dollar terms. In your mind, what will your firm's assets look like in one year? Use the following outline:

Cash........................
Marketable Securities.......
Accounts Receivable.........
Finished Goods..............
Raw Materials...............
Plant and Equipment.........

Total Assets.............= $

If you elect the short cut, estimate that you will need at least as much working capital, in dollar terms, as the estimate for plant and equipment. Working capital is the money that allows the firm to operate while waiting for the revenue from its sales. You will need to pay salaries, shipping costs, advertising costs and so forth. Only 60% of your sales revenue is coming in the first quarter as cash sales. The balance of sales won't arrive until next quarter when accounts receivable, are in fact, received.

Cash needs in your first quarter of operations will also increase if you purchase product through contracts, as this will automatically generate a special loan. See chapter 6 for more details.

The second quarter, if sales are constant, the accounts receivable money comes in along with cash sales for quarter two. Your firm should have a stable cash flow as it enters the third quarter of decision making. If production and sales are not stable but growing, you will need to increase your working capital needs by the percentage of growth in sales each quarter until the firm reaches maturity.

Be aware of seasonal peaks in sales. Cash needs follow sales which follow seasonal patterns.

If you intend to purchase your own raw materials for "future" use (which is much cheaper than buying raw materials at market), you will need cash to buy them in the first quarter for use in the following quarter. Increase your working capital needs by 20%.

If you plan level production instead of producing to estimated quarterly demand, you will need more money to carry the finished goods inventory. All the money to produce the finished goods will be outgoing, but "0" will be incoming. Thus, for inventoried finished goods you will need considerably larger funds. Increase working capital by another 25%.

Following are some statistics from a previous simulation. Analysis of how previous teams designed their asset structures might help you determine team options:

 

Firm Number	% of Assets in Plant	% in Working Capital
11	.46	.54
12	.39	.61
13	.36	.64
14	.60	.40
15	.67	.33
16	.74	.26

At the simulation's conclusion, firm 12 had the highest overall market group return to its stockholders. Firm 16 had the highest stockholder return across all industries. Their asset structures were very different from one another, as were their capital structures. The initial start-up decisions are critical. However, both of the firms mentioned above (12 and 16) had outstanding performance with radically different asset and capital structures.

Firm 16 kept its plant working at maximum production (two shifts and a good deal of overtime). It had just-in-time manufacturing; that is, no finished goods inventories and only enough raw material to meet two weeks of manufacturing. Cash was always at minimum with extra cash paid out in dividends. If cash was short, account receivables were factored. Is this a good idea? It is if it works, but many things could go wrong. Perfect just-in-time scheduling is required to meet the demand that was forecast from perfect forecasting. For team 16, there was never enough cash to support major errors or shocks. They never hit a major crisis and thus, stockholders loved them. However, the workload and quarter-to-quarter tension on individual team members was considerable.

Firm 12 put the customer first in quality and delivery. They always wanted to end each quarter with finished goods instead of disappointing customers with lost sales. Raw materials were always ordered in advance to lower unit manufacturing cost. Market shares were strong and consistent as were profits. The team was dedicated to the firm's vision and each member contributed.

What will be your firm's asset structure? How much money does your firm need? When you have determined the capital need, the next step is to secure the funds.

Where should you get the money from? Stockholders expect you to earn 20% per year, about 5% a quarter, on their equity money. If you get it from banks and bondholders, they expect about 8% to 10% (less on an after tax basis). Before you avoid stockholders and rush into the arms of the banker, understand the following: If you do not pay the stockholders, all you get are complaints and mediocre to low stock performance. If you do not pay the bankers, they will force you into bankruptcy and in the process will destroy your credibility as a manager, the very life of the firm, and of course, your performance evaluation.

So, how much money do you want from the stockholders (equity funds) and how much from creditors (debt funds)? This is a basic risk and return decision crucial to the welfare of the firm and its vision. It requires the attention of all team members.

To measure risk in the capital structure, two ratios are often used. They measure the same thing in two different ways. One of these ratios is debt-to-equity. Zero means no debt, 1/1 means half debt and half equity.

The debt-to-total-assets ratio measures the same thing. If this ratio is used, the same half debt and half equity capital structure would be 50 Debt/100 Total Assets or .5. Be sure you determine which ratio people are discussing before you interpret this particular risk.

If either ratio indicates more than half the firm is financed with debt, the bond markets might not respond to your request for further funds.

US creditors, in general, are reluctant to lend more to a firm than the stockholder's equity in the firm. Short term and term loans are unlimited as long as debt to equity does not exceed 1.5/1. If the debt to equity ratio exceeds these limits, the bank may call loans and\or shift the balance to a special loan. Interest on a special loan is extremely costly. This shift will not occur automatically. Rather, it will be enforced during simulation bank audits. These audits are often, but not always, announced in news bulletins.

Return to review the capital structure of firm 12 and 16. Firm 12 was conservatively financed. It issued 1,000,000 shares of stock. It could withstand extreme market and/or financial shocks.

Firm 16 issued 350,000 shares of stock and secured borrowed funds from all available sources. As profits came in, they repurchased shares down to the minimum required (300,000 shares). Firm 16 had extreme risk. Its asset structure was very heavy in fixed assets (high degree of operating leverage). There was little working capital with cash kept at a minimum. This high risk asset structure was funded by a high risk capital structure. Loan payments and interest had to be paid. This is living on the edge. Keep your eyes upward on the vision and don't look down!

Should your firm attempt such a risk in search of first place? Two other firms tried it in this particular simulation. They both went bankrupt. One team started over and ended up in an average position. The other team finally had another firm up and running at the end of the simulation.

We made several quarterly runs issuing different amounts of stock for a firm. The following results summarize our findings. Remember, you must issue and maintain at least 300,000 shares.

Shares Issued	Amount Received Per Share	Amount Received Per Share
300000	$4.07	$3.54
400000	$3.09	$3.00
500000	$2.92	$2.94
600000	$2.92	$2.98
700000	$2.59	$2.56
1000000	$2.92	$2.33
2000000	$2.28	$2.51

The two columns listed under "amount received per share" represent two tests run on the same day with the same market group. Notice how random factors moved stock prices slightly, everything else remaining equal.

These estimated values were only obtained in the first quarter's economic environment. The firm's history and economic environment will be different in subsequent quarters, therefore results will be different. It is required that 300,000 shares, minimum, must be issued when your firm begins operations and maintained at that level, or greater, throughout the simulation.

If performance is measured, in part, by return to the stockholder (dividends and stock price), then the number of shares issued is an important consideration. Net Profits are divided by the number of shares outstanding to determine earnings per share. Earnings per share, over time, is the main driving force for stock price.

Thus, the more debt in the structure resulting in fewer shares, the greater the stock price given a profitable firm. If a firm loses money, the earnings per share are negative. In this case, the more shares, the smaller the loss per share and the more stable the stock price.

As a strategy in a start-up venture, since sizable loses can be expected in the first few quarters, all stock to be sold within the year might be sold to the public in the initial offering. Investors may take additional issues of stock in the following quarters as a sign of financial weakness. There is a limit, on the amount of stock which may be repurchased. This limit is 10% of outstanding shares per quarter. If, therefore, part of your strategy involves repurchasing shares, your team will need to devise a repurchase plan using the 10% limit.

If you issue or repurchase stock after the initial offering you must give public notice. Failure to do so could result in law suits brought against you by shareholders. Each investor must be alerted. This may be accomplished by posting a message to WebCT.

How do you envision the firm's liabilities and equity at the end of the first year? Fill in the following sources of capital. The total must equal the firm's total assets envisioned earlier in this chapter.

Accounts Payable...................
Special Loan (36% annually)...........
Short Term Loan ....................
Long Term Loan......................
Bonds ..............................

Total Liabilities................=$

Common Stock($1) ..................
Paid in Capital....................
Bond Discount (disregard at this time)
Retained Earnings..................

Total Equity..............=$

Estimate your first year's earnings. Most firms will lose money in the first two quarters. The more aggressive the firm, generally, the larger the loses in the first two quarters.

After reading this chapter, pencil in, as best you can, your preference for an initial balance sheet as outlined above (assets, liabilities and equity). Discuss this with team members. Revise, argue, debate, compromise. Knowledge is power.