Tower46 LLC

Tower46 LLCwww.tower46.com


FORAD Multinational Business Finance Simulation

Business School Course


Agenda

2

Executive summary

Why use this product?

The FORAD simulation: FORAD company structure and details Decisions process Share price calculation Simulation process Reporting and reviews

The FORAD company decisions - details

Learning points

The FORAD simulation – management and logistics


Summary - what is the FORAD simulation?

3

The FORAD BUSINESS FINANCE SIMULATION is a computer based game designed to help the students, usually in teams of 3 to 6, understand what it takes to manage the financial and operational challenges of a multinational corporation. The company operates in a challenging market environment and competes with the rest of the FORAD companies.

The management of the company involves DECISIONS in the areas of forecasting, operations and budgeting, choice of financing options, risk management and international taxation strategies, shareholders’ relationship. The focus is on corporate finance decisions.

The teams’ PERFORMANCE is measured by the company’s share price which depends on the earnings per share achieved and a combination of a number of performance measures which include credit rating, success in risk management, effective tax rate, quality of earnings, other.

The performance depends on the users’ ability to understand the key corporate finance concepts and apply those lessons in managing a complex organization in competitive and unpredictable MARKET ENVIRONMENT – subject to the simulation

The software provides the users with detailed REPORTING and a number of other DATA TOOLS to help their decisions and review processes.


How does this product improve the course?

4

The simulation presents multiple key finance concepts (capital structure, capital costs efficiency, operating analysis, capital budgeting, valuation are just examples) and therefore is suitable for a wide range of traditional finance courses.

Regardless of the course focus, it allows the users to also see “the big picture” about managing multinational corporation and examine how certain decisions affect multiple areas of the company.

It challenges the users to address variety of trade-offs – equity vs debt financing; ST vs LT debt; conservative versus aggressive risk management are just a few of many.

The game format replicates the real world and adds another layer of complexity to the learning experience – unpredictability of the market and the competitors’ behavior.

It gives the users the chance to experiment with their decisions and try unlimited number of combinations and iterations to test the lessons learned in the classroom.

WHAT

HOW

The FORAD simulation makes the course more effective by teaching important lessons , further enhanced by the way the learning is delivered:


How does this product help the instructor?

5

The FORAD company structure and the simulation performance and results could be used as semester-long case for class discussions.

Adjustments to established course schedule are not a requirement and depend only on the instructor’s preference – the FORAD simulation could be simply an addition to the class and the learning points focus could be aligned with the class objectives.

The addition of the FORAD simulation does not require major time investment to advise the teams – the players’ manual includes all details needed. If requested, interpretation of the results and other supporting materials can be provided by the Tower46 teams.

The competition element increases the students’ engagement and interest in the class. Performance in the simulation can be used as additional objective assessment of the students’ success in understanding the course material.

Additional benefits for the course instructor:



The FORAD simulation – details


The FORAD Company structure

7

Banks: LT/ST loans; FX hedging instruments

Shareholders: Equity;Dividends

Clients:Domestic sales; International sales

IC loans and dividends

IC trade

U.S. Holding Company

Japan Operational Subsidiary

Germany Operational Subsidiary



Clients:Domestic sales; International sales

IC loans and dividends

Consolidated FORAD

Company

IC: Inter-companyST: Short-termLT: Long-term


Decisions process

Multiple steps, but no formal flow or limit for the desired iterations

Preparation - analyze company’s results, study competitors results; forecast the market data; set goals and plan the current period

Operations – decide capacity and production levels, looks for ways to improve revenues and profitability

Financing and investing – review the company needs or excess resources; borrow or repay debt, decide on maturity and currency, issue equity or buyback shares

Review – examine expected results, stress test for unexpected market data, think for ways to increase EPS and/or PE score, adjust the decisions

Tax management – search for opportunities to lower corporate tax rate – via IC loans, transfer pricing, IC dividends

FX management – review the exposures and decide on the hedging approach


FORAD simulation process

9

Team 1 Decision

The teams submit their decisions files to the Administrator

During the simulation, the teams’ predictions for market data are replaced with the market actuals and teams’ results are recalculated

Team 2 Decision

Team N Decision

The teams receive their final results with complete detailed reporting package and can proceed with the next period decisions

The teams also receive companies’ rankings, selected data for the competitors and economic commentary forecast for the next period

Next period forecast

Industry summary

Team 2 Results

S I M U L A T I O N

Team 1 Results

Team N Results


The FORAD company share price calculation

10

Share Price = Annualized Earnings per Share x Current PE score

Credit worthiness,

30%

Currency hedging, 20%Planning skills,

10%

Tax management,

20%

Dividend management,

10%

Quality of earnings, 10%

PE score elements, description and weights:

Credit worthiness Debt/Assets ratio; debt maturity; credit rating; interest expense

Currency hedging FX gain or loss compared to conservative hedging approach

Planning skills Ability to predict market data and company's results

Tax management Effective tax rate for the consolidated company

Dividend management Corporate dividend compared to earnings; consistency

Quality of earnings Size of non-core earnings; total earnings volatility; dilution effect


Reporting

11

The model automatically generates multiple reports:

For the competitors and the industry:• Share prices, EPS, PE scores by company• Operations and production highlights• Consolidated financials of the competitors • Market data and forecasts Individual teams’ detailed results:• Financial statements by subsidiary in local

currency and in USD• All current and historical decisions and results by

position – FX exposures and results, borrowings and investments, productions data, tax management

• All reports are downloadable in Excel

6.00

9.00

12.00

15.00

18.00

P1 P2 P3 P4

T1

T2

T3

T4

T5

T6

$50

$100

$150

$200

P1 P2 P3 P4

T1

T2

T3

T4

T5

T6

PE scores by team by period

Share prices by team by period


Decisions and results review tools

12

Historical Reports

Decisions Details

Stress Tests

Excel Downloads

At any time - access to the team’s historical decisions and results with all details included

Includes operations, financing, hedging, taxes, PE

score elements, financial statements by subsidiary

and consolidated

All reports can be downloaded in Excel and analyzed as desired or be a base for other independent modeling and reviews

The model offers multiple tools for the users to review their results to enhance the learning experience

The users can enter extreme values for market inputs to explore the effects and test

the decisions’ quality in such cases



The FORAD company decisions


Operations decisions

14

Even though the FORAD teams have limited opportunities to influence the sales levels, operations decisions are crucial for the company’s profitability. Some decisions affect the company’s performance over long-term, others have immediate effect.

Long-Termeffect

Develop long-term strategy for capacity investments – given the trade off between having enough capacity on time and the cost of funds to purchase it

Decide how much to produce the current period to meet the demand, but also whether to build inventory for the near future to minimize the costs

Decide on each period’s collection and payment terms to optimize the revenues and the cash needs. Decide on the collection currency and Inter-company trade details.

Mid- Termeffect

Short-Termeffect


Japanese subsidiary US Holding Company German subsidiary

Equity; LT/ST loans; Swaps; Marketable securities

IC loans

LT/ST loans; Swaps; Marketable securities

IC loans

Financing decisions

15

Cash needs: Based on the operational decisions and predictions, the model estimates the cash needs by subsidiary on a few key days within the period – day 0, 30, 45, 60 and 90.

Available capital and investments: • Debt - fixed and floating rate Long-term (LT) loans in the subsidiary local currency; Short-term (ST)

loans in all three currencies; Inter-company (IC) loans in USD• Equity - the Holding company can issue equity from the shareholders and repurchase shares• Swaps - the teams can enter into plain vanilla interest rate swaps for their LT debt positions • Marketable debt securities – the teams can invest excess cash in marketable debt securities

Effects: These decisions affect corporate structure and credit worthiness, interest rates management results, FX exposures and effective corporate tax rate.

LT/ST loans; Swaps; Marketable securities


Foreign Exchange Hedging decisions

16

Foreign ExchangeExposures

Foreign ExchangeHedging Instruments

Foreign ExchangeResults

Given the operational decisions, the teams can review the FX exposures by type, by subsidiary and by currency:• Trade exposures –

receivables and payables

• Financial exposures – ST and IC loans

• Exposures from IC dividends

Hedging instruments available:• Forward contracts• Options contracts• Operational and

finance decisions to adjust the exposures

Both hedging and speculative positions are allowed.

The model calculates expected FX gains and losses by position:• From the underlying

exposures• From the hedging and

speculative positionsThe gains and losses are based on the teams’ predictions for the period end FX rates.


Tax management decisions

17

Transfer Pricing

Inter-company Dividends

To optimize the corporate effective tax rates, the FORAD teams take decisions on three main items:

Inter-company Loans

Minimize the subsidiaries income tax rate by paying Inter-company dividend to the US Holding company at the optimal payout ratio. Minimize the net foreign tax credits and deficits.

Influence the profitability of the two operational subsidiaries with different income tax rates by changing the transfer price for the Inter-company trade relationship, the currency of invoice and the pay terms.

Another way to influence the subsidiaries’ profitability – by using Inter-company loans to transfer funds within the company and charge the best from tax perspective rate.



Learning points


Learning points – Finance skills

19

Risk management Identify, understand and manage risk exposures – those resulting from volatility in the foreign exchange rates, interest rates, commodity pricing

Use economic commentaries to develop market forecasting process Learn how to use various hedging instruments and structures

Corporate structure and capital markets

Define corporate structure and manage credit worthiness Choose between multiple sources of capital available – equity capital, short-

term and long-term fixed and floating rate debt Refine the details – currency, duration, type, risk profile Learn to evaluate the strategy and how to adjust, if needed

The FORAD simulation allows the users to build skills in multiple areas of corporate finance – very helpful for any well rounded finance professional, and therefore, crucial for

success at the work place


Learning points – Finance skills – continued

20

Financial planning and analysis

Use market data to forecast the sales and structure company’s operations accordingly

Manage the company budget for long-term assets (capacity) and med-term assets (inventory)

Understand the long-term effects and plan beyond the current period

International taxation

Learn about the differences in the local tax rules ad rates Test the various tools available to a multinational corporation to achieve

better tax efficiency

Financial statements analysis

Learn how to read and explain the numbers after they have been already generated

Get the opportunity to review the historical results and examine the trends

Competitors’ analysis

Learn how to use limited publicly available data for the competitors to draw conclusions for their strategy ad make adjustments to be more competitive


Learning points – Managerial and Organizational skills

21

Management Skills

See the big picture about managing a complex organization and how certain decisions effect other areas too

Acknowledge and manage trade-offs and learn to prioritize and focus Learn to evaluate performance, identify mistakes and recover Accountability – take ownership of the decisions and defend them to the

public, develop and follow internal rules

Organizational Skills

Time management – deadlines in FORAD are similar to the deadlines in the real world and require tight organization

Team dynamics – success in FORAD is nearly impossible without effective team with quality discussions and team commitments

Communication skills – learn to communicate and negotiate within the team, but also when presenting the company’s decisions and results

The FORAD simulation also allows the users to build skills in areas outside of corporate finance – to complete the overall training experience



The FORAD simulation – management and logistics


Performance assessment

23

+Written reports: • Allows the teams to review and analyze their performance again and reflect on the

lessons learned. Could be structured similarly to US public company regular filings to practice reporting skills .

Presentation and Q&A session with a panel of judges (other instructors, professionals):• Further enhances the learning power of the game; the event could be open for

everybody interested and increase the course popularity and the students’ visibility.

1

2

3+

Highest share price at the end of the simulation: • Highlights a team with solid profit and also success in the majority of the PE score

elements. Other benchmark are an option too – market cap, specific element of the PE score, FX results, only operating profit or only non-operating profit, others.

The competition gives the instructor multiple tools to objectively rank and evaluate the students’ performance. All are optional and could be customized.


Suggested simulation schedule

24

FORAD simulation game could be run along side a semester-long course:

Stage 1 - pre-game and first decision (2-3 weeks) – form teams, distribute the players manual and allow the teams to get to used to the software and the rules when preparing their 1st period decision

Stage 2 – core game (6-7 weeks) – allow a week for each period decision Stage 3 – final results and debrief (2-3 weeks) – distribute the final results; allow the teams to prepare

their final reports, presentations and decisions defenses, if used

Stage 3

Prior to the game Week 1 of game Week 2 of game Ongoing…. Last week of game After the game

Form teams, distribute manual,

install modelTeams work on

period 1 decisionPeriod 1 results and

commentary-----

Teams work on period 2 decision

-----Priod period results

and commentaryTeams work on last

period decisionFinal results and

debrief

Tower46 team provides interpretation of the results, answer questions, other finance or techincal support

Stage 2Stage 1


Responsibilities

25

Class Instructor: Primary contact for the students - form

teams, distribute the materials, answer questions

Post each period results Evaluate the teams’ overall

performance Incorporate the learning points in the

course goals

Tower46 team: Technical support Support for all financial calculations

and assumptions used in the model Training for the instructor and

administrator manual if used Help with the students’ questions, if

needed Recommendations and best practices

Class Instructor or Tower46 team: Administer the simulation process Create scenario for the simulation and the supporting

market commentaries Interpretation of each period results

Instructor’s choice


Logistics and other details

26

Possible game formats:• Semester-long course with decisions due weekly • Intense short course with decisions taken each day (usually for executive education) Teams and users - no fixed requirement for the number of teams or team members. 3 to 5-member teams offer good balance between work load and efficiency and 5 to 10 teams provide the best competitive environment. Length – the simulation could continue between three and 20 periods, ideal results are achieved between 5 and 8 periods. Location - the learning experience is most effective when teams discuss their decisions and results together, but they do not need to be physically at the same location and could work remotely.

Administration – could be administered by the course instructor (brief training would be needed) or remotely by Tower46 member. In all cases – interpretation of the results and help with any questions from the users will be provided by the Tower46 team. No specific technology requirements.

Documentation:• Manual for the users with all details to play the game; no additional training required • Manual for the Administrator, if needed • Ready to use market scenarios with economic commentary packages; customization of the

scenarios is an option

Documents

Tower46 LLC