Transcript FinGame Results - High Point University

FinGame Results
Game Strategy
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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
Profitability
Profitability
32.00%
Gross Profit Margin
31.50%
31.00%
Gross Profit Margin
30.50%
30.00%
29.50%
29.00%
28.50%
28.00%
27.50%
27.00%
1
2
3
4
Actual Quarters
5
6
Financial Reasoning
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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.
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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.
Counteracting Long Term Debt
Through Short Time Financing
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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
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Debt Ratio Cont.
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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
Debt Ratio (Actual)
Debt Ratio
0.60
0.50
Debt Value
0.40
0.30
0.20
0.10
0.00
1
2
3
4
Actual Quarters
5
6
Debt Ratio (ProForma)
Debt Ratio
0.60
Debt value
0.50
0.40
0.30
0.20
0.10
0.00
1
2
3
4
Pro Forma Quarters
5
6
Fundamentals of the business
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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 noncyclic 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
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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
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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
Return on Equity (ROE)
Actual
Return on equity
35.00%
Return on equity
(ROE) - Quarterly
Percentage of Profit
30.00%
Return on equity
(ROE) - Annual
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1
2
3
4
Pro Forma Quarters
5
6
Return on Equity (ROE)
ProForma
Return on equity
35.00%
Return on equity (ROE) - Quarterly
30.00%
Return on equity (ROE) - Annual
Percentage of Profit
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1
2
3
4
Pro Forma Quarters
5
6
Mistakes and Tips for Future
Generations
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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
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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
Conclusion
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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.