Decision-making guide

Copyright© Cesim Oy 2000-2024

1. Simulation platform introduction

1.1. General user interface options
1.2. Home
1.3. Decision checklist
1.4. Decisions
1.5. Results
1.6. Schedule
1.7. Teams
1.8. Readings
1.9. Forums
2. Decisions
2.1. Main Objective & Winning Criteria
2.2. Successful decision-making flow
2.3. Best practices for good teamwork
3. Market outlook
4. Demand
4.1. Total market and company market share
4.2. Market shares
5. Production
5.1. Production costs
5.2. Inventory
5.3. Investments
6. Human resources
7. Research & development
8. Marketing
9. Logistics
10. Taxation
11. Finance
11.1. Suggestion for capital structure decisions in case you have accumulated excess cash
12. Projections
12.1. Income statement
12.2. Balance sheet
13. Calculation of key financial ratios
1. Simulation platform introduction

1.1. General user interface options

1. Profile - Here you can change your email, password and add a personal picture to be displayed
on various parts of the user interface. You can also change your account's language and time
zone, and determine the automated email notifications you wish to receive. Please enter a valid
email address to avoid missing out on important information from your instructor or teammates.
You will also need it should you require the "Forgot my password" feature.
2. Help - Here you can reach the Cesim Support team if you run into problems or issues relating to
in-game functionality. For any content-related questions, contact your instructor.
3. Logout - Use this button to log out.

1.2. Home
 1. Results summary - These graphs show your performance in relation to the competition. You
will see this after the completion of Round 1 (or Practice round 1, if present).
2. Activity - This section shows you recent activities, including the history of decisions submitted
and the rounds' deadlines.
3. Tasks - If your instructor has assigned a quiz or a peer evaluation to your course, you will find
it here. Should you be required to submit document(s) to the platform, the link will be shown in
this section.
4. Messages - Forum posts will be shown here.

1.3. Decision checklist

The Decision checklist displays all decisions made in the game. It shows both a Team Decision
Area and the individual Student Decision Areas. Each team member has a decision-making
area, where they can input any figures and see the effects they have on the projected results.
By default, the students always start with their own Student Decision Area when logging in to
the game. When the deadline passes, the round results will be calculated based only on the
Team Decision Area.

The Decision checklist offers several tools to manage the decision-making process:
 1. Round-based drop-down menu - Use the drop-down menu to select the desired round. You may
select previous rounds in order to review the decisions made during those rounds, although
modifications will be disabled. By doing this, you can also access the previous market outlooks.
2. Legend - The different colours of the cells will help you to identify the active decision area and
whether a change has been made to the decisions.
3. Go - This button allows a player to view another teammate’s Student Decision Area, or the Team
Decision Area. Any modifications will be automatically recorded in their respective area. Any
modifications made in the Team Decision Area will be used as final decisions when the round
ends, should no further actions be taken. Be careful about relying on direct modifications to the
Team Decision Area. If any team member overwrites (copy as team’s decisions) existing decisions
in the Team Decision Area with their own, there is no backup for the overwritten decisions. Making
plans on your personal Student Decision Area ensures the decisions are safe, as your teammates
cannot overwrite decisions in your own area with a single click.
4. Copy as team's decisions - This button copies a player’s decisions from the Student Decision area
to the Team Decision Area. Once copied, the previous set of decisions cannot be recovered.
Decisions can be copied from the Student Decision Area to the Team Decision Area as many
times as needed prior to the round deadline. If decisions are made directly into the Team Decision
Area, then no additional steps need to be taken, as they will be automatically used to calculate the
results when the round ends.
5. Import - This button transfers the decisions made in a Team- or other player’s Student Decision
Area to the importing player’s own Student Decision Area. Once imported, the original decisions of
the importing player cannot be recovered.

1.4. Decisions
The Decisions are split into sub-categories (e.g. Demand, Production, etc.). Some areas should be
filled in first, as they affect other areas.

There are two general types of input fields:

 1. Decision cells - The decision cells can appear as input cells, drop-down menus, checkboxes
or buttons.
2. Estimation cells - Estimation cells are where you can enter sales estimates, personnel
turnover, etc. These estimations act as a basis for the budgets shown in the system.
The system automatically updates the budgets and calculations as you make decisions and/or
estimations.

1.5. Results
The round results are calculated as the deadline passes, using the decision sets in each team’s
decision area. The results from previous rounds, including possible practice rounds, are
accessible and you may also download the results as presented in an Excel file or as a
slideshow of main indicators.

1. Universe-based drop-down menu - This allows you to choose any universe in the course. A
universe is a group of competing teams affecting each other’s results.
2. Round-based drop-down menu - This allows you to choose the desired round results.
3. Excel - Here you can download an Excel file showing the results of the chosen round.
4. Print - This button allows you to print the results of the round.
5. Slideshow - This button will allow you to view a slideshow of the key indicators of the round.
1.6. Schedule

The Schedule page displays a timetable of the rounds’ deadlines. The results are calculated as
soon as the deadline of the round passes. Unless otherwise restricted, decisions can be made on
each round as soon as the previous round’s deadline passes.

An instructor can choose to have up to three practice rounds for a course. Once the practice
round(s) are over, the game will reset to the initial market situation. The initial decisions for the first
actual game round are imported from the first practice round. Other than that, the practice rounds
have no effect on the results of the actual game rounds.

1.7. Teams

The Teams page contains the teams' compositions across all the universes of the course. On this
page, you may also edit your own team’s information, such as the team name, slogan and/or team
description.
 At the start, when no deadlines have passed, you can join any team that has an empty slot.
Simply click the Join Team button. After the first deadline has passed, only the instructor can
move participants between teams.

1.8. Readings

This section contains documentation that participants need to read and comprehend in order to
enjoy the game. The generic reading materials include this decision-making guide and a case
description. Instructors can also upload additional materials here.

The case description gives information regarding the business case that is being played on the
course. It gives a general understanding of the company, industry, trends and challenges.

1.9. Forums

The forums are a great place for players to contact their instructors or fellow players, especially
in situations where face-to-face time is limited.
There is a Team Forum, a Universe Forum and a Course Forum. The Team Forum allows your
team members to see posts and reply to them. The Universe forum only exists if multiple universes
feature on the course, and can be seen by all players in the respective universes. The Course
Forum is available for every player registered on the course.

Instructors can view and reply to forum posts in the three sections. As such, the Course Forum is a
good place to ask questions that everyone on the course can benefit from, while the Team Forum is
the ideal place to discuss sensitive team-related issues.

Players will be notified by email whenever something is posted on their team forum area (unless
they choose to disable this function in the Profile section).
2. Decisions

2.1. Main Objective & Winning Criteria

The main objective for the teams is to deliver sustainable, profitable growth. Typically this is
measured by a ratio called “cumulative total return to the shareholders”, which combines share
price development and dividends paid to show the total return to the shareholders. The
instructor may, at his/her discretion, choose to use other criteria to measure the performance of
the teams. For example, market shares, accumulated profits, and revenue growth can be used
if so decided. We recommend cumulative total return to shareholders due to its
comprehensiveness. The teams may try to manipulate their profits, revenues, and market share
in the short run, but share price will punish any short sighted decisions sooner rather than later.

2.2. Successful decision-making flow

These instructions will help you as you go through the decision-making tool for the first time.
When you are more familiar with the model, you can make decisions as you prefer.

2.3. Best practices for good teamwork

For each round, appoint a "CEO" who is ultimately responsible for coordinating the team effort and
submitting the final decisions. Circulate the CEO role from one round to another.
Pay special attention to timing. Each team member can work independently, but be sure to
coordinate efforts for maximum synergy.
Use the Team Forum to exchange ideas about strategy and decision-making. The forum will store
your correspondence so that you can refer to it later on while deciding how to implement your
strategy.
Agree on an internal deadline for each round, by which time each team member will have made
his/her own decisions and suggestions. This deadline should leave enough time for the team to
select the optimal decision prior to the actual deadline.
Use the Decision checklist to inspect and select the final team decisions. Here you can see all
team-members' decisions side-by-side. You can also access each team-member's Student
Decision Area. You can use a team-member's decisions set as the starting point for the team
decisions, and then make the necessary adjustments. You can also directly edit team decisions in
the Team Decision Area.
3. Market outlook

1. It is essential to read the “Market outlook” before you start to make decisions. They contain
important information on current market trends and possible future developments.
2. At the top of the page you'll find the “Projections” button. Here you can find your projected
results with regards to projections (balance sheets and income statements), main ratios and
the simulation's parameters. These parameters (costs, exchange rates, tax rates, etc.) are
presented for the current round and the previous one. You can take advantage of this
information e.g. when planning for taxes, logistics and investments.

Note

Quantitative parameters, such as tax rates, are forecasts for the round and they tend to
be fairly accurate. Market development, on the other hand, can differ from Market
outlook, since markets are influenced by the actions of competitors. Therefore, market
growth may not materialize exactly as predicted.
4. Demand

1. It is advised to start the decision-making process by estimating the total market growth for each
market area. The information on the "Market outlook" page will help you make these estimations.
2. After estimating the market growth, you can choose which products you want to sell in each area.
Each area has two product slots. At the start, your company does not have all the technologies for
production and sales. As you go further into the game, it becomes possible to research and
manufacture more sophisticated technologies. (See the chapter on “Research and Development”
for more information about new product development.)
3. Now that you have chosen which technologies to sell, the next task is to estimate the market
shares you expect for each product. These forecasts are used by the model to calculate your
company's projected income statements and budgeted production figures. The “Last round”
column shows the market shares that the company had in the previous round. Total market shares
for the current and last round for all three regions can be seen below the table.
4. Once you have estimated the total market growth and your market shares, you can see the
expected demand for each area here. Keep in mind that these are only estimations; the actual
results depend on the success of your decisions relative to the competitors.
5. These graphs give projections of advancements in planned infrastructure/network coverage for all
four technologies. The infrastructure for each technology is a prerequisite for demand; a
technology will not have any sales unless its infrastructure is in place. Higher coverage indicates a
higher potential for demand. Network coverage is an important factor in determining the demand
for products using new technologies.
 Demand for a team is determined in three steps:

1. The total market size for each market area is calculated based on the parameters.
2. The total market demand is then divided into different technologies.
3. The market shares for each company are determined. The factors affecting the market shares
are: the number of offered features; selling prices; promotion; the previous round’s market
share; and the attractiveness of the technology on the market.
The attractiveness of each technology may vary a lot depending on the market area. New
technologies tend to be more attractive than older ones and thus generate more demand.
However, sometimes a new technology may flop in some market areas, but be a huge success
in others. The market outlook can give more insight into the expected attractiveness of new
technologies.

The division of demand between technologies is also strongly affected by:

Price level (a new technology is usually priced higher than an older one)
The number of companies offering products using that technology
Marketing efforts

4.1. Total market and company market share

1. Factors affecting the total market size:

Economic conditions
Average price level
Average promotional budget
Technological evolution
2. Factors affecting a technology's share of the market:
Price level of the technology
Promotion of the technology
Number of companies offering the technology
Network coverage
Attractiveness of the technology
3. Factors affecting a company’s market share for the technology:
Price
Promotion
Number of offered features
Previous round’s market share
Number of companies offering the technology
4.2. Market shares
Everyone starts with the same market share, but as soon as you start making decisions, the market
shares start to change. The picture below illustrates an imaginary situation with four different teams.

1. Team Yellow, 30%

2. Team Purple, 15%
3. Team Blue, 22%
4. Team Green, 33%
Team Green's market share consists of two products

5. Team Green's Combustion has a 25% share of the total market area
6. Team Green's Hybrid has an 8% share of the total market area
By combining the market shares of these two technologies we get the company’s total market share
of 33%. Remember: when estimating demand percentages for your products, the percentage
estimate refers to the whole market area, not the demand for that specific technology.
5. Production
Global allocation of production is an important success factor in this simulation. There are two
production areas from which you can supply the three market areas.

1. Here you can allocate technologies to each production line, and production line capacity to
each product. With two production areas and two production lines in each area, you can
select any combination for the four technologies. In this example, production lines 1 and 2 are
used for both production areas.
2. The simulation automatically calculates the unit cost (see “Production costs” section). The
Scrap (%) depends on the maturity of each technology in production. Scrap (%) is taken into
account in the unit cost.
3. Here you can decide how much production is contract manufactured. You can only allocate
technologies which are chosen for production at your own production lines. There is a limit as
to how much you can contract manufacture during each round. The cost of contract
manufacturing is also given here, and it varies according to the manufacturing amount. In this
example, production is allocated to contract manufacturers in USA but not in China.

Food for thought

The cost of excess capacity allocation consists of inventory management costs, the
cost of capital tied into the inventory, potentially excessive production unit costs and the
risks associated with having excess inventory of old products.

5.1. Production costs

The production costs are affected by the following factors:
 Basic cost level in the production area
Production cost function (U-shaped curve)
Learning curve effect
The basic cost level indicates the cost of producing the first unit of the new technology. For
example, if the initial employee skill level/efficiency is lower in China, the basic cost will be higher in
China than in the USA.

An example of a U-shaped production cost function can be seen below. The cost multiplier is used
to multiply the basic cost level.

1. Cost multiplier
2. Capacity utilization
The learning curve effect is a significant factor regarding production costs. The X-axis represents
the cumulative GLOBAL production of a certain technology. In our example, you could prioritize
production in USA before moving production to China when the learning curve reaches a certain
level. The example below illustrates the logic.
 1. Unit cost, USD
2. Global cumulative production per technology

5.2. Inventory

In this page, you will find detailed information regarding your company’s inventory planning.
You can access the inventory holding cost information by selecting “Parameters” in the
“Projections”. Inventory management costs are based on the average inventory of the previous
and current round. Capital costs are the implied costs of having capital tied into inventory.

The beginning and ending inventory figures are also presented on the “Logistics” page.
Inventory planning is managed by production volume decisions in relation to sales volumes and
does not require any active input from the participant on this page.

USA and China production facilities have their own inventories and products are never shipped
between the areas unless there is market demand. All products in inventory are carried at their
original production cost. Oldest products are sold first (FIFO principle) and there is no
depreciation of inventory.
5.3. Investments

1. Here you can estimate the global demand for the next two rounds. Demand for the current year is
based on estimates made on the “Demand” page. Future projections are important for more
accurate capacity planning. You can check the “Capacity planning” graph to see when capacity
will become available.
2. Based on your future growth expectations, you can decide whether to invest into new production
facilities in USA and/or China. In addition to future capacity needs, you need to pay attention to
cash flow needs in each area.
It is possible to divest existing production plants from both areas. You can divest a production
plant by entering a negative value into the relevant decision field.
3. This graph contains information on the projected evolution of your demand and capacity. It is a
useful tool for visualizing the relationship between your estimated demand and capacity.
Food for thought

When you make a plant investment, you are committing a substantial amount of money
into a long-term investment. You need to be sure that you can pay for the investment
with the revenue that you make from it.

For example: the price of the plant is 1200 M USD and plant capacity is 200 k units. You
can sell your products in the future at about the same price as you are currently
managing in the US, about 20000 USD. Furthermore, your average operating profit
before depreciation is about 10%. When you multiply the annual plant production
capacity (assuming that you use the plant at an average of 80% utilization rate) by the
expected margin per product, you get about 320 M USD operating profit before
depreciation (200 k units x 80% x 20000 USD x 10%). This needs to cover the
depreciation and the costs of financing the plant. Here depreciation is calculated as
15% based on declining balance. This gives you a depreciation of 180 M USD (1200 M
USD x 15%) during the first year of operations. (Declining balance emphasizes the first
years over the last ones, which is reasonable in this kind of high-technology business
environment). After depreciation, you have 140 M USD (320 M USD - 180 M USD) left
to cover financing and investor risk.

Return on investment (ROI) in this example is 11.7%. That is calculated by dividing

Operating profit (EBIT) by the cost of the investment (140 M USD/1200 M USD).
6. Human resources

On this page, you will be able to hire personnel to handle your in-house Research & Development.

Your management of human resources requires three decisions to be made: how many employees
you require for this round, along with budgets for monthly salary and training. You can choose the
workforce as you wish, assuming your salary level is sufficient. You can also lay off as many
employees as you wish. (You can hire or lay off employees by changing the "Personnel this round"
decision from its prior value.) Employee turnover is updated automatically, and the amount of laid-
off employees will be reduced by the amount of employees leaving the company of their own
accord.

Salary, other associated employment costs, training, recruitment, layoffs and other R&D costs are
included in “R&D” on the Income Statements. You can find more information about costs by
selecting “Parameters” in the “Projections”.

Key drivers to consider with regards to human resources include employee turnover and efficiency.
Employee turnover refers to employees leaving the company of their own accord (i.e. without being
laid-off). Salary, training, company performance and the efficient use of employees' time affect the
employee turnover rate. Higher salaries, cumulative training expenditures and low turnover all
support a higher level of employee efficiency. The more efficient your workforce, the easier it gets to
develop more advanced technologies and product features. Efficiency is measured as a multiplier;
an efficiency multiplier of 1.2 means that your R&D personnel is 20% more efficient than a team
that has a value of 1.
7. Research & development
There are two ways of improving your company's technological capabilities: in-house
development and license purchasing. In-house development has a one-round delay before the
technologies and features researched become available for production, while license
purchases make them immediately available for production.

Both methods are substitutable and complementary ways of building competence, which
means that you can first develop features thanks to your own R&D before deciding to buy a
license and improve the technology further, again with your in-house R&D. You can use any
combination of the two methods to reach the desired level of technologies and features.

The required amount of person-days for in-house development varies based on your level of
employee efficiency. The ultimate cost of development also depends on your salary and other
HR decisions. This means that you have to synchronize your product development decisions
with your human resources decisions.

It is important to note that in-house development doesn’t reduce costs for technology and
design licensing. For example, if Team Green decides to start to research a new technology
using in-house development, but fails to invest enough to complete the development, whereas
Team Red proceeds without any investment on the same round, the licensing cost for the
unfinished development on the following round is the same for both teams.

1. These graphs show the development progress and the number of features available for each
technology.
2. Here you can make decisions about your own R&D investments for each technology. The
platform indicates how much investment is required in order to make a new technology
available or add a new feature for an existing technology. Keep in mind that all research from
your own R&D investments are available with a delay of one round.
Food for thought

R&D investments are very strategic in nature and it is difficult to apply any exact investment
calculation method to them. At best, such calculations require heavy assumptions and
uncertainty. Nevertheless, when considering investments into new technologies, you should
think how many products you must sell in order to recover the money that you spent on the
development. Following your competitor may not be the best alternative, since they can also
make poor investments.
8. Marketing
On the Marketing page, you decide upon the number of features proposed for each product
and also your marketing mix i.e. product, price and promotion. These decisions need to be
made for each product and market area. It is important to keep in mind that the success of your
marketing mix will be determined by the markets. Customers will be comparing different
alternatives and make their purchase decisions accordingly.
1. The first decision you make is to decide upon the number of features offered. More features cover
more of the various customer preferences, but also incur more costs.
2. Decisions regarding price and promotion are set here. Pricing decisions are always made in the
currency of the area, while promotion is always given in USD. Promotion has a long-term effect.
3. Here you will decide upon a focus for your marketing strategy. You can alter this focus on a round-
to-round basis, separately for each market and product slot. The marketing focus decision should
be in line with your other decisions.
Balanced – No focus or extra effort. No additional gain/loss.
Low price – The product pricing has an amplified effect. Consequently, if you set the
price lower than the market average, you gain more demand than without the focus.
On the other hand, if you set your focus as Low price but don’t deliver, you will lose
more demand than without the focus.
Features – The feature selection has an amplified effect. If you set your focus as
Features and deliver more than the market average, you gain extra demand. And if
you deliver less than the average, you lose demand.
Footprint – The promotion and prior market shares have an amplified effect. Logic
as above, if your promotion and prior market shares are higher than the average,
you gain more demand. In case of lower than the average, you lose demand.
Brand – Sustain and promote your company image through external means, by
improving your social media presence and building brand awareness. This will give
a small fixed gain for demand, but there is no downside.
4. As soon as you have decided upon product, pricing and promotion, you can see your budgeted
financial outcome here.
5. Here you can view the amount of products available and the potential unsatisfied demand or
ending inventory.
The implementation of different product features leads to costs. You can implement a varying
amount of features for your products in each market area, with each feature carrying an additional
cost. Features can only be implemented if your company has reached the respective technology
competence level, by either using in-house development or buying technology and design licenses.
Feature costs can be calculated by multiplying the number of features by the feature cost. You can
find more information about the feature cost by selecting “Parameters” in the “Projections”.

Food for thought

When you make your decision regarding promotion, you should analyse the sales margin
that you can generate with that product in the specific market. However, in the medium term
you must be able to pay for all the product’s promotion with the sales margin that the
product brings in. A useful rule of thumb is to allocate approximately 10% of the sales
margin, depending on the effect of the promotion in the market. You should expect to spend
a further amount during the launch of a new product.
9. Logistics

1. Here you can choose the order in which you will satisfy demand in the different markets, both
for production areas and all the relevant technologies. E.g. For Combustion production, which
will take place in the USA, you may prioritize the USA followed by China and finally Europe.
This decision is only relevant if your global supply is insufficient to fully satisfy your global
demand. If that should happen, supplies will first be cut from the third market (Europe), then
from the second market (China) and lastly from the first market (USA).
2. Here you can see where your products are made and expected to be sold. The total cost of
transporting products is the actual transportation cost + tariff. You can find more information
about the transportation costs and tariffs by selecting “Parameters” in the “Projections”. There
is no transportation cost for products that are sold in the same area they are produced in.
There are two types of tariffs: flat and ad valorem. Flat tariffs are charged as a fixed fee per
product imported, while ad valorem tariffs are based on the value of the product defined by
the transfer price and the feature costs. Both tariff types may be in use simultaneously.
Food for thought

When you set the priorities for delivery, you should attempt to maximize your total margin
from the products. This can be achieved by prioritizing those markets where unit margins
are the highest. In other words, if you run out of supply, you want to make sure that it
happens in the market where your unit margin is the lowest.
10. Taxation

1. Here you can adjust your profits between different units and you can make other business
units participate in R&D and other fixed costs. Transfer pricing can also be used to benefit
from different tax rates between countries. The multipliers must be between 1 and 2. The
transfer price is thus 1 to 2 times the product’s direct unit cost.
2. This chart shows taxable profits and effective tax rates, for all regions and the company as a
whole.
3. This table details how the effective income taxes are calculated and divided among the
regions, and how transfer pricing decisions affect the total amount of payable income taxes.
Taxes are always paid locally. The statutory tax rates are applied to taxable profits, meaning
that losses from previous rounds (called loss carry forward) reduce the amount of taxes that
have to be paid in the current round and consequently lead to effective tax rates that are lower
than the statutory rates. Moreover, transfer pricing can be used to shift profits between the
regions so that more profits are reported in low tax regions, thus reducing the effective tax
rate of the whole company.
11. Finance
Financing decisions are typically the final set of decisions that you make. All financial market
transactions are managed through the parent company (USA). You decide upon:

increases (+) and decreases (-) in long-term debt

the issuing of shares
share buybacks
dividend payments
treasury management (transferring funds between group companies)
The issuing and buybacks of shares are made according to the market valuation at the start of the
round. The number of shares issued (repurchased) affects the issue (buyback) price.

You can also transfer funds between different countries using internal loans (International Treasury
Management). You may want to use internal loans if you have accumulated substantial cash
reserves in China or Europe that can be repatriated and distributed to the owners, or if you need to
finance some plant investments in China.

For each year, there is a minimum end-of-year cash requirement. If cash falls below the required
level, the financial department automatically fills that gap with short-term debt. Short-term debt is
automatically paid when possible and it is usually more expensive than long-term debt. You can find
more information about the minimum end-of-year cash requirement and the difference between
interest rates for short- and long-term debt (Premium for Short-Term Debt) by selecting
“Parameters” in the “Projections”.
 Try to keep in mind that the idea is not to minimize the cost of debt, but to maximize the return
on equity. The winner of the game is determined by the total shareholder return, which
measures the return that the team is able to generate for the shareholders during the simulation
rounds.

1. Here you can decide upon:

increases (+) and decreases (-) in long-term debt
the issuing of shares
share buybacks
dividend payments
2. In this graph, you can view the capital structure of the company. Try to avoid an extreme
imbalance between debt and equity.
3. Here you can transfer funds between different countries. It is usually recommended to finance
Chinese and European operations via the parent company in the USA.
All finance decisions are made for the parent company (USA). While making these decisions, it
is useful to observe the parent company's cash flow statement on the right.
11.1. Suggestion for capital structure decisions in case you have
accumulated excess cash
After financing group activities in the three areas, check the cash situation in the USA. If you have
excess cash, you can consider the following logic:

1. Check the capital structure. As a rule of thumb, you should try to keep the equity ratio (equity
divided by total assets) within the range of 40-60%. If it is less than 40%, it is more beneficial to
repay debt than to pay a dividend. If it is more than 60%, you are probably not fully benefiting from
the tax shield effect (related to Weighted Average Cost of Capital, WACC).
2. Decide upon the amount of cash and/or short-term debt required as a "safety buffer" for your
operations. The more uncertainty you have in your sales estimations, projections and budgets, the
higher your cash buffer should be. The short-term debt premium should be compared to the
difference between the interest of both cash and long-term debt.
3. Pay dividends according to your dividend policy.
4. If you still have excess cash, pay it out to the owners. You have two complementary alternatives:
Buying back shares - If you buyback shares, you improve the earnings per share
(repurchased shares are immediately cancelled). Note that you should buy back
shares over a long time period. If you attempt to buy a large amount at once, you
will create demand in the market and the average buyback price rises.
Pay extra dividends - Dividend payment will be taken into account as part of the total
shareholder return. (I.e. Money is transferred from the company cash-box into the
shareholder's cash-box.)
The weight between share buy-backs and extra dividends is mainly driven by taxation.

Since we only consider corporate tax in the simulation, the recommendation is that you set a
dividend policy that is in line with your long-term profitability.

Of course, timing is a key factor. The old investor rule of "buy low, sell high" applies in corporate
equity transactions as well.

Food for thought

The reason why you should maintain an approximately equal amount of equity and debt on
your balance sheet is that by doing this, you minimize your cost of capital. The smaller the
cost of capital, the higher the net present value of all your company's future cash flows, thus
the higher the market value of your company. In other words, the lower the cost of capital,
the more investment opportunities that exceed the cost of capital (i.e. more business).
12. Projections
The projections are easily accessible from any decision making page by simply selecting the
button in the top-right corner of the page. They update continuously as you make decisions or
estimations. They form the projected results for the round, hence the name “Projections”. The
actual results calculated at the deadline will differ due to the estimations never being entirely
accurate.

12.1. Income statement

Here you can follow the group's projected profitability, both as a whole and for each individual
area.

In this simulation all R&D and promotion costs are expensed on the income statement for the
round the investments are made. As a consequence, profit for the year may fluctuate
depending on the intensiveness of decisions relating to R&D and Promotion.

R&D is considered to take place in the area(s) where you have production plants. E.g. if you
only have production plants in the USA, your entire R&D expenses will appear in the USA
income statement. When you have production in China as well, R&D will be split proportionally
between USA and China according to the number of production plants in each of them. Note
that you can also use the transfer prices to roll R&D costs to other areas (e.g. China, Europe).

Administration costs include the company's overhead costs i.e. the company's fixed costs,
which are not allocated to the different products. Administration costs include the basic cost per
market area and an extra cost for service and maintenance of the production plants. This cost
is dependent on the number of plants - the higher the number of plants in an area, the lower the
cost per plant.

Administration costs breakdown:

 Fixed cost (for all companies regardless of company size)
Variable administration cost (share of total revenue)
Administration cost for each plant
Team-specific fines
Inventory management costs
Any losses from previous rounds are carried forward as per the "loss carryforward" principle. Thus,
even heavy losses may be evened out during later rounds, as future incomes incur lower taxation.
Deferred taxes do not expire, e.g. potential losses made during the first round will continue to be
deducted from taxes until the losses are covered.

12.2. Balance sheet

Receivables and payables are automatically calculated as a percentage of sales and production
costs.

Additional paid-in capital indicates the difference between share issue/buyback price and the face
value of the share.

Short-term debts are taken automatically if the company does not have enough liquidity to run the
operations.
Food for thought

Your goal in the simulation is to maximize the shareholder value. With this in mind, you
should aim to run the company with as small a balance sheet as possible, without
jeopardizing current profits and future growth opportunities. If you can generate the
same profit with a lighter balance sheet, you have utilized your assets more effectively
and thus need less money from investors.
13. Calculation of key financial ratios

Cumulative total shareholder return (p.a.), %

Share price at the end of round + cumulative dividends per share + interest f or dividend This round

= 100% × [( ) − 1]
First round share price

Prof it f or the round

Return on sales (ROS), % =
Sales revenue

Shareholder's equity
Equity ratio, % =
Total assets

Interest-bearing liabilities (short and long-term) − Cash and cash equivalents

Net debt to equity (gearing), % =
Shareholder's equity

Operating prof it (EBIT)

Return on capital employed (ROCE), % =
Average shareholders' equity + Average interest-bearing liabilities (short and long-term)

Prof it f or the round

Return on equity (ROE), % =
Average shareholders' equity

Prof it f or the round

Earnings per share (EPS), USD =
Shares outstanding at the end of round

Dividend per share

Dividend yield, % =
Share price at the end of round

Share price at the end of round

P/E ratio =
Earnings per share (EPS)