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FinGame Results. Game Strategy. To test the market by following suggested financial decisions made in Quarter 1.
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Game Strategy • To test the market by following suggested financial decisions made in Quarter 1. • Knowing that poor earnings had a devastating effect on the stock price and dividends, we initially planed to keep the gross profit margin high while paying the lowest amount possible for our merchandise
By Quarter 3 we noticed that productivity was not being maximized due to a lack of plant space. We then decided to compensate for the deficit through a purchase increase, yet failed to realize that one unit of plant capacity equals one unit of product, and therefore underestimated the amount of plant space needed to meet future productions. It was also recognized in this quarter that the excess in machinery was causing us to lose money. In regards to this quarter, we should have purchased more plant space when the game began so that our financial inefficiency would not have occurred, and allowed us to possibly be more profitable earlier on. Financial Reasoning
Counteracting Long Term Debt Through Short Time Financing • Though we felt incurring the initial debt of the factory would eventually net a substantial income we still wanted to decrease the amount of debt that we currently possessed. Therefore, we attempted to pay off our short term debts, which would negate the amount of debt we possessed leaving the bond taken on to finance the acquisition of the plant.
Debt Ratio • Ratio used to determine how risky a company is and how much it owes to its investors • The proportion of liabilities that a company has relative to its assets • In the beginning of the game we were more conservative due to lack of knowledge of the environment but towards the end of the game we took on more debt through bond loans, high interest rates and short-term investments • Our overall debt ratio for the game as a whole was .363; Showing that we were relatively conservative in our financial decisions
Debt Ratio Cont. • Initially our goal was just to have a debt ratio less than one • However, as we became more familiar with the game, we wanted to maintain the debt ratio that paired with the highest stock price, which was .20 • Strengths: Investors consider our company safe to invest in, we were not required to pay high interest rates, and we did not run the risk of running out of money when needed • Weakness: Missing out on potential profitable investments and sitting on large amounts of cash instead of using it to profit the business
Fundamentals of the business • Every company has a common goal of producing a great product which increases revenue while keeping the cost of labor low and increasing their equity • While stockholders’ common goal is to have a higher rate of return in the company of their choice • Smart investors look for the subtle changes in a non-cyclic company. If revenues and profits are on a steep upward trend, with no indication of leveling off, then they will invest and the stock will increase
Sector Changes and Market Swings • Sector changes are simply sudden changes in the market, which can have an negative of positive impact on the stock price…ours being the “Wehrley Shift” • Market swings are the natural flow of the market; it could go up or down at any time, which can push stocks up or down; which accounts for the variation in accumulated wealth • The fluctuations in our stock price was a direct correlation of our net income and investments in the company
Return on Equity • Defined as: how efficient a company is in reinvesting earnings to generate additional earnings • Investors look for a high and growing ROE percentage rate of companies to invest in • The shareholders of our company did not receive a good return on their capital that was invested in the business due to the sharp increase of interest expense, decrease in gross profit margin and therefore decrease in net income during Quarter 4. • The ROE was also decreased because of the bond we used to finance the large amount of plant purchased, significantly reduced our net income
Failing to purchase a plant when needed left us with excess machinery, a steadily raising demand and an absence of inventory for the last two quarters This small mishap cost us a lot of money, trust with our shareholders and halt in productivity For a percentage of the time our ROE varied slightly from the bank because we were not using our assets properly Take advantage of the “wehrley’s shift” to buy back shares Pace your production in relation to plant capacity and machinery Finance long-term projects with long-term debt; (debt should not be paid off until looking at your ROA and ROE) Never sit on idle cash, always reinvest it in the company for growth and/or distribute to shareholders Mistakes and Tips for Future Generations
Conclusion • As a result of not purchasing more plant space upon the commencement of the game we failed to maximize productivity, which ultimately caused a loss in possible profit. Once recognized profits began to increase and the new focus became the management and financing of debt incurred as a result of asset acquisitions and debt control.
