The Fin Game Student Notes & Background Information You can consider that you have been

recruited by the owners of the company to replace all the existing key management as they were all killed in an air accident. You have, finance, sales and HR departments who are there to give you historical information as well as projections. Management is about risk control and adapting strategies to changing market places. Initially this is fairy restrictive but as the game continues, and then you have more opportunity to expand. You need to plan, manage the risks and establish a strategy. You need to create happy shareholders. The principal objective of the game is to increase shareholder wealth. (Exhibit 4.3 Accumulated Wealth) You must read chapters 1-4 before starting. I will not answer any questions that are clearly explained in the manual. You may well find that the guide to the understanding & Interpretation of financial statements will assist you. Advance Codes. All quarters will be advanced by way of instructor given codes. This will restrict all to advancing at the same time. The final quarter will be advanced by the instructor. For the initial 4 quarters, the following will be restricted:

Setting Sales Price Setting Marketable Securities Risk Offering sales discounts Being able to advertise the product.

The Life Cycle of the business. The company is mature but has failed to make adequate investment into plant and machinery. You will need to establish how and when you invest. Caution on failing to invest ahead of time as Plant takes 2 quarters and Machinery takes 1. The costs of purchasing additional capacity does vary by each quarter. Resetting & Rerunning quarters During the initial 5 quarters, the instructor will allow resetting so that errors can be replayed and corrected. Decision Interrelationships. Caution to appreciate the interrelationships. Interest Rates. Be careful to calculate these as well as adjust for retiring debt in both the income statement and the balance sheet. Sales Discounts (see also Working Capital management below) These are really early settlement discount for quick payment. Short Term Liquidity. Caution as this is expensive. Use the simulations and your calculations to evaluate this. Too much cash not invested is a real negative. Selling & Administration Costs Selling and admin is $1m plus 5% of sales

Share Issue & repurchase Initially selling shares might well be a good idea. The company needs capital to fund extensive investment into plant & machinery. Clearly shares are one way to raise this capital. As the shareholders wealth increases, so will the share price. This clearly affects both the selling and repurchasing of shares. Note that signalling theory will apply here. Note that there are penalties on the repurchase where you fail to repurchase all you want to. Many are disappointed at the low level of shares actually repurchased even when large premiums are offered. Note that the simulation will not show what will actually happen with share repurchases, nor the cash flow affects. So be careful of the cash flow consequences. Dividend Policy You need to establish one. Volatility in this is a negative. Also beware that again, signalling theory applies. Consider both the arguments of Miller & Modigliani and the cash flow needs of investors. However, do not be surprised if when you are highly profitable but shareholders are disappointed with no dividends. Working Capital Management Accounts Receivable For the first 4 quarters, you are restricted offering discounts to sales to get them to pay quickly. After that, 1%-2% can be offered. This will generate improved cash flows but substantially affect profitability. Accounts Payable. There is nothing you can do to extend this. Inventories. It is recommended that you use a spreadsheet to maximise this. You need to balance the following:

Cost of Warehousing (This gets very expensive when inventories exceed 7,000) Likely production Likely sales Required closing inventories (Perhaps to assist with excessive sales in next quarter) Opening inventories. Costs of production ( Note best to produce between 100k-120k units)

Cash Balances. Beware of excess cash. Capital Structures Be careful of the costs of debt and gearing. Whilst debt is cheaper, the costs of potential bankruptcy must be balanced with the benefits of this. Always ensure that debt commitments can be met in both interest cover and repayments. Liquidity Penalty interest is charged when you go overdrawn at the bank. Do not forget any repayments of debt. Also there is a need to keep sensible cash balances. Too much will represent lost profits. Even marketable securities only yield a small return. Caution of the risks of Marketable Securities. Purchase of Plant & Machinery Often students fail to provide for this. You must review production capacity in both terms of plant and machinery. You need to invest in time. Note optimal production is between 100k and 120k. Outside this costs increase due to inefficiencies or overtime. So remember it takes 2 quarters for plant and 1 for machinery. Note that each quarter, the costs of plant and machinery vary.

Playing the game Each quarter, start by printing off the previous quarters results. This gives you all the information shown on pages 46-48. Plan what sales and production you expect. Balance inventory management. Evaluate future plant & machinery requirements. Evaluate how you will fund investment. Appraise projects A and B. Review liquidity. Consider dividend policy. Constantly use the simulation forecast to help you. Be careful as it will not give you all the information. Try to create a medium term strategy. Business is not effective if managed from one crisis to another. Disasters in the first 5 quarters can be re set and re run. Use Excel Spreadsheets to manage inventories, plant & machinery requirements, projects A & B and debt repayments. Sales & Activities For the first 5 quarters, this is fairly constant. Note that thereafter, every 4th quarter has a blip. Yes this is a seasonal business. ( Quarters 6,10,14,18 and 22) The forecasts are quite accurate. You can purchase more accurate ones but probably not necessary initially. You need to ensure that you maximise the demand and have available inventory to meet it. Price elasticity is limited initially so have a go!. Projects A and B. Initially you can reject both if you have limited time. However, try to get one of your team to set up a matrix so that these can be easily evaluated. It is recommended that an excel spreadsheet template be created. WACC and Cost of Capital. It is difficult to establish this as CAPM requires information that is not available. I recommend that you use the cost of equity to be the return on equity. ( See 4.3 page 48 ) and the cost of debt from the interest rates being applied. Use the book values in your balance sheet and therefore a % cost of each equity and debt. Price Elasticity Initially there will be very little. As the game advances, this will increase. Marketable Securities Risk For the first 4 quarters this is nil. However, it will then increase. So be careful.