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NEW Glo-Bus - AC Camera and UAV Drone - Business Strategy - Making Decisions - Part 3/4

NEW Glo-Bus - AC Camera and UAV Drone - Business Strategy

New GLO-BUS — 2017 Edition

NEW Glo-Bus 2017 - AC Camera and UAV Drone - Business Strategy

Action-Capture Camera Design

UAV Drone Design - Making Decisions   - Part 1/4

NEW Glo-Bus 2017 - AC Camera and UAV Drone - Business Strategy

Action-Capture Camera Design

UAV Drone Design

Making Decisions   - Part 3

 

 

 

Corporate Social Responsibility and Citizenship (CSRC)   

This decision page concerns spending for such things as charitable contributions, “green” initiatives to promote environmental sustainability, the use of renewable sources of energy, improved working conditions for plant personnel, and institution of a supplier code of conduct and compliance monitoring of supplier factories. The decisions on this page are straightforward, and you will find ample information and calculations on this page and in the Help section to guide your entries. The degree to which your company displays good corporate citizenship and conducts operations in a socially responsible manner affects your company’s image rating. However, the image gains are minimal unless your company’s actions are “comprehensive” (involve several, but not necessarily all, of the optional citizenship and social responsibility programs), entail more than token efforts (as indicated by how much money is being spent), and represent an ongoing effort of at least 4-5 years.

 

Finance and Cash Flow Decisions The Finance and Cash Flow decision page involves 8 decision entries and provides projections of cash inflows and cash outlays for the current year, along with projections of other important year-end   financial statistics. Going into Year 6, your company has a B credit rating and a reasonably strong balance sheet. At the end of Year 5, the company’s total assets were financed with 46% debt and 54% equity, putting the company in good position to cover its interest and principal payments on loans outstanding to the Global Community Bank (GCB), with which the company does all of its banking, financing, and foreign exchange transactions.

Interest Rates. Officials at GCB, under terms of the long-term banking agreement with your company, have agreed to lend the company additional monies should you elect to use debt to help finance growth and other financial needs. The interest rate on such loans is tied to the company’s credit rating and the going rates of interest in world financial markets. Just as interest rates in real-world financial markets change intermittently and unpredictably, there is no way to predict in advance what future interest rates will be. The interest rate on 1-year (short-term) loans for companies with an A+ credit rating can range from a low of 4% to a high of 7%; the interest rate on 1-year loans for companies with a C- credit rating can range from a low of 10% to a high of 13%. Going into Year 6, the interest rate on 1-year loans for companies with an A+ rating is 4.5%; C- rated companies pay 11% interest on 1-year loans. The GCB’s present interest rate for 1-year loans carrying a B rating is 6.5%. Longer-term loans are available at somewhat higher interest rates—a 5-year loan carries a 0.50% interest rate adder and a 10-year loan carries a 1.0% interest rate adder; these adders apply to 5-year and 10-year loans granted at all credit ratings. New interest rates for 1-year, 5-year, and 10-year loans are announced at the beginning of each year and appear in the Interest Rates table on the Corporate Lobby page.   The company's banking arrangement with GCB calls for the company to be paid interest on any positive cash balance in the company’s checking account at the beginning of each year. The agreed upon interest rate is set at 3.5 percentage points below the prevailing interest rate for short-term loans carrying an A+ credit rating. Going into Year 6, the interest rate of A+-rated 1-year loans is 4.5%; thus the money market rate paid on cash balances will be 1.0%. If the company overdraws its checking account, GCB will automatically issue your company a 1-year “Overdraft” loan in an amount sufficient to bring your ending cash balance up to zero. The interest rate charged on overdraft loans carries a 2% adder (i.e. 8.5% if your B credit rating carries a 6.5% short-term interest rate). The potential for overdrawing your checking account is signaled by a negative “Ending Cash” number in the Projected Performance box at the left of each decision page (however, even a very small positive Ending Cash number runs the risk of having an overdraft loan, since there is always uncertainty that sales volumes, revenues, and cash inflows will be as high as projected).

Factors Determining the Company’s Credit Rating. Analysts at independent credit rating agencies review the company’s financial statements annually and assign the company a credit rating ranging from A+ to C-. A company’s credit rating is a function of three factors: (1) the debt-to-equity ratio (defined as the percentage of total assets financed by debt and the percentage financed by shareholder equity investment in the business); (2) the interest coverage ratio (defined as annual operating profit divided by annual interest expense); and (3) the current ratio (defined as current assets divided by current liabilities). Your company’s prior-year and projected performance on these three credit rating measures is shown in the section at the bottom right of the Finance Decisions page. This allows you to see when actions are needed to maintain a good credit rating. (See the Help section for full details about how the three factors combine to determine the company’s credit rating.)   

Financial Decisions. Finance decision entries should always come last in the decision-making process. Until all of the other decision entries have been finalized there is no way to get reliable projections of cash inflows and outflows for the year and estimate the company’s projected year-end cash balance. The eight finance-related decision entries revolve around the following issues: • Borrowing moneyTo finance operations the company may take out loans with 1-year, 5- years, and/or 10-year terms. One-year loans are granted at interest rates corresponding to the company’s current credit rating; 5-year loans carry an additional 0.50% and 10-year loans carry a full 1% interest rate adder. In addition to a lower interest rate, a 1-year loan has the advantage of quicker debt pay-down and smaller total interest costs, but also has the disadvantage of having to re-finance the debt in the following year at perhaps less favorable interest rates should cash flows not be sufficient to fully fund a 1-year loan   repayment. Longer 5 or 10-year loans have the advantages of locking in what may be an attractive long-term interest rate and lowering annual principal payments; however, 5-year or 10-year loans, in addition to their higher interest rates, have the further disadvantage of paying out bigger sums for interest over the life of the loan (which, in turn, depresses the company’s interest coverage ratio over a longer period of time). •

Issuing shares of stockAdditional capital may be raised by issuing new shares of common stock. New issues of common stock have the effect of diluting earnings per share and ROE and should be done cautiously. From time to time, you may determine that the company needs to raise additional equity capital to (1) help pay down a portion of the outstanding loans (because of burdensome interest costs or because lowering debt is the best way to improve the company’s credit rating) or (2) help pay for added assembly capacity and/or robotics upgrades. The company’s board of directors has established a 40- million share maximum on the total number of shares outstanding and there’s an on-screen calculation showing the maximum number of shares that can be issued in any one year (given the company’s financial condition). The company cannot issue new shares in the same year that it elects to buy back (retire) outstanding shares. At the end of Year 5 the company had 20 million shares outstanding. Each time you make an entry specifying how many shares are to be issued, there are accompanying calculations showing the total amount of new equity capital raised (see the cash inflows section) and the price at which investors will agree to buy the newly-issued shares (the price declines as more shares are issued because additional shares dilute earnings per share). In deciding how many shares to issue, you can try several “what if” entries and check out the effects on earnings per share, return on equity, and the amount of money raised.   

Early repayment of long-term bank loansYou have the option of accelerating debt retirement (or refinancing high interest debt) by using excess cash on hand, new issues of stock, or proceeds from new loans to pay off the outstanding principal on up to 2 of the outstanding 5 and 10-year loans. This is accomplished by simply selecting the loan number of the loan you want to pay off (loan numbers are indicated in Note 8 to your company’s balance sheet). All such loan repayments are considered end-of-year repayments; thus, the company will still make the current-year annual principal payment and interest payment on any long-term loan that is repaid early.

Paying dividendsThe company paid no dividend to shareholders in Year 5. You have the authority to declare a dividend, subject to certain conditions. The maximum allowable dividend entry is 2 times projected earnings per share; moreover, projected total shareholder equity must always remain at or above $100 million after any and all dividend payments. No dividend can be paid should projected total shareholder equity fall below the $100 million minimum established by the company’s board of directors (a policy that won the enthusiastic approval of credit rating agencies). Higher dividends are welcomed by share holders and have a positive effect on the company’s stock price (unless dividend payments exceed earnings per share and can’t be sustained at present levels).   

Repurchasing shares of stockUsing cash on hand to repurchase and retire outstanding shares has the advantage of increasing earnings per share, returns on equity investment, and the company’s stock price. While you have the authority to initiate stock repurchases, the Board of Directors has reserved the right to limit the number of shares repurchased in any given yearsuch limits vary from year to year and are shown on the Finance Decisions page just below the stock repurchase entry field. The company must maintain a minimum of 15 million shares outstanding and a minimum total shareholder equity of $100 million. The company cannot repurchase outstanding shares in the same year that it elects to issue new shares. Each time you enter a number for share repurchases, you are provided calculations showing the total cost of the repurchased shares (see the cash outlays listings) and the price at which investors will agree to sell the shares you want to buy back (the price rises as more shares are repurchased because of the upward impact on earnings per share and the bigger fraction of ownership that fewer shares represent). In deciding how many shares to repurchase, you can try several “what if” entries and check out the effects on EPS, ROE, and cash needed for repurchased shares.   

Decision-Making Procedures It is feasible (often normal) for co-managers to log-on simultaneously and each be engaged in entering decisions. In the communication section at the bottom-left of all decisions/reports pages there is a microphone button that connects teammates to audio mode (live voiceover internet communication). The adjacent button (with the arrows) enables collaboration mode, synchronizing each connected team member so that all see the same page at the same time. You will find it highly desirable to work jointly in “audio mode” and “collaboration mode”. Any time a co-manager clicks the Save button (upper-right), all of the entries on all decision entry pages are written to the GLO-BUS server. Any and all co-managers can enter save decisions, and all entries can be changed and resaved as many times as desired prior to the decision round deadline set by the course instructor.

The last set of decision entries saved (by any team member) before the decision round deadline are the entries used to generate the results for the round. Coordination and consensus on the decision entries is strongly urged but is left as a matter for you to work out with your co-managers   

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