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MARGA Quick Guide

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2. Controlling 5 6. Return on capital employed (ROCE) 8 BE A TEAM. Products and markets 2 4. Decision area `Production and logistics‘ 4 4. Decision area `Finance and administration‘ 4 5. Introduction 1 2. Calculation of the value proposition – MARGA Value Added 5 6. BE SUCCESSFUL.3. Result 6 6. Cost of capital 6 6. .1. Decision-making fields 2 4. Decision area `Marketing‘ 3 4. MARGA Quick Guide 1.3. Your company objective 1 3.2. BE AN ENTREPRENEUR.1.

1 1. banks) will receive interest on the capital borrowed.e. congratulations on your appointment to the MARGA management board.. . Both the cost of equity and the cost of borrowed capital (i. Both groups of investors receive an additional payment for investing their capital into the MARGA company. Introduction First of all. 2. sales. Your key success figure is the so-called MARGA Value Added. This manual is a quick guide on the main simulation rules. etc. market shares.. The previous management failed in differentiating the company from its competitors. The equity investors will receive part of the business profits. Your company objective The overall objective of the simulation is to increase the value of your MARGA company. All companies have the same prices. 1 The calculation of the MARGA Value Added is explained on page 5. This is the main reason why the previous management was replaced. A more detailed explanation of all functions can be found in the simulation software. 1 Figure 1: Measurement of success The starting point is the capital that is invested in your company. and therefore start into the first period from an identical ‘initial situation’. cost of debt) add up to the cost of capital which a company has to carry and earn to be profitable. It can be divided into equity and liabilities. whereas the outside creditors (e.g.

Product 1 is a ‚consumer good‘. The MARGA managers attached great importance to pushing the product on the market quickly. At the end of a round. Product 3 as a capital good is sensitive to economic cycles.. Decision-making fields You manage your MARGA company by using an integrated planning tool. Product 3 is a new ‘capital good’. 3. It has been launched successfully to a specialist tar- get group and is at the beginning of its growth phase. Product 2 is a new 'service product' just going through its launch phase.e. If the company’s profits do not cover the cost of capital. i. the winner is the company which has created the highest company value (accumulated value propositions of all periods in one round). It covers the following main decision fields:  Marketing  Production and logistics  Finance and administration The software outlines these decision areas and gives comprehensive controlling infor- mation. . that was launched on the market some time ago and which is firmly established in most markets. competition analysis tools. annual reports. thus value is destroyed. cost accounting information. 4. the MARGA soft- ware.2 All additional company earnings signify an extra value. etc. At present the consumers are not yet familiar with your new product. Products and markets Your MARGA company can produce three different products and sell them on up to four markets: The home market (EU) and up to three foreign markets (EEMEA. It looks as if the times of high market growth are over. Americas and APAC).

your mar- keting mix is a combination. of the following marketing instruments:  Price and advertising  Sales force  Research & development (R&D) Table 1 gives you a survey of the main marketing decisions within your MARGA company. you have to set up a sales force budget. budget for mar- ket 1 ket 2 ket 3 ket 4 Detailed information about this decision area can be found in the MARGA software. .3 4. For each of the up to twelve product-market-segments (three products in up to four markets) you have to decide on a price. an advertising budget. budget for mar. For each product. Therefore.1. budget for mar. your planning procedure should start with marketing and sales. you have to set up a budget for research and development (R&D). and the planned sales volume. Market 1 Market 2 Market 3 Market 4 All markets Product 1  Price  Price  Price  Price  Advertising  Advertising  Advertising  Advertising R&D budget  Planned sales  Planned sales  Planned sales  Planned sales for product 1  Shipments  Shipments  Shipments Product 2  Price  Price  Price  Price  Advertising  Advertising  Advertising  Advertising R&D budget  Planned sales  Planned sales  Planned sales  Planned sales for product 1  Shipments  Shipments  Shipments Product 3  Price  Price  Price  Price  Advertising  Advertising  Advertising  Advertising R&D budget  Planned sales  Planned sales  Planned sales  Planned sales for product 1  Shipments  Shipments  Shipments All Sales force Sales force Sales force Sales force products budget for mar. specific to product and region. Decision area ‘Marketing’ Following a market-based approach. and for each region.

4 Besides the markets. The current utilization status and the capacity level of your company can also be found in the ´environmental data´. about effi- ciency and how to handle peak capacity. you may outsource parts of your production. For each product. you will require three main resources: 1. fringe benefits and the allocation of temporary workers. 2. 3.3. about invest- ment options and the impact of disinvestment (`Environmental data’ as well as Online support / Help). In addition to producing by yourself. The software informs you about setup and use of your machinery. and no storage is needed. Hence. 4. For the production. Decision area ‘Finance and administration‘ The focus of your financial planning is the liquidity management. The amount of raw materials needed for the production. Information about the conditions can be found in the MARGA software. 4. you decide on recruitment and dismissals of personnel. Your workforce – skilled and unskilled workers – is the second manufacturing re- source. you may decide to take out a bank loan or to . In this case an external supplier delivers trade goods to you. After you have decided on marketing and production. about capacity utilization and maintenance costs. Based upon this. which automatically orders the exact amount you need. you should control your cash balance (see planned balance sheet under ‘Controlling’). you need to make a price offer to get this additional order. In this case the raw materials are delivered just-in-time directly to your assembly line. you have the option to participate in a public call for tender when indi- cated. Decision area `Production and logistics‘ Based on your sales plan you will have to decide on the production amount of your three products.2. about personnel training. you need a certain number of both unskilled and skilled workers. you need two different types of raw materials which you can order from your supplier. In case you wish to participate. Machines: You use three different machine types which have to be operated at differ- ent capacity factors for each product. Instead of ordering actively you may also use a Supply Chain Management tool.

MARGA only considers those expenditures which occurred for the quantity of products sold in the very period. You can find the balance sheet. At the end of a round. which on the one hand shows the company’s assets and on the other hand its provided capital (shareholders’ equity and liabilities). If it is positive. value has been destroyed. the income statement is used for the income calculation within one period. Calculation of the value proposition – MARGA Value Added The MARGA Value Added (MVA) of one period is calculated by subtracting the cost of cap- ital from the earnings before interest and taxes (EBIT). The earnings and expenditures of a business period are compared. the rules for the MARGA annual financial statement have been strongly simplified concerning various details. the income statement as well as the cash flow statement in the MARGA software under `Controlling’ (‘results report’ as well as ‘financial reports’). The income statement elaborates more in detail how the period result has developed. MARGA Value Added → Result – cost of capital . if the MARGA Value Added is negative.e. With the so-called cost of sales accounting.5 pay dividends to your shareholders. Additional cash can be invested in the capital market. Therefore. You will find the financial condition i. the winner is the company which managed to accumulate the highest MARGA Value Added throughout all periods. Controlling Compared to reality. the company has created value. 5. You may also influence your liquidity by changing your own payment policy to your suppliers or the cash discounts you offer to your cus- tomers. The balance sheet is a comparison at a certain due day. to allow a quicker and easier access to the company cost accounting. 6. the cash balance on the balance sheet (see current assets). whereas the cash flow statement shows the overall financial condition of a company at the end of one period with all the accumulated in/out-payments ordered by departments.

g. Cost of capital The cost of capital is composed of cost of equity and cost of debt.6 The following section points out which result value is used and how the cost of capital is calculated in detail. a company is faced with. Please find a more detailed explanation below:  Cost of debt At MARGA. because they are subtracted separately from the cost of capi- tal. There is a clear differentiation between short-term and long-term credits as well as to ex- traordinary balancing loans. The interest calculation of equity and debt is varying.2. share value) and this. The higher the risk. 6. the rate of return expected by the equity investors is rele- vant. The value is considered before tax. The com- parison of the accumulated value propositions does not lead to a falsification of contest. it is self-evident that in this case the rate of return is higher than in the case of low-risk assets (e. which is the basis of the calculation of the value proposition.g. since all companies are paying the same rate of taxes. of course. Result At MARGA the result. hides a rather high risk. It is referred to as EBIT (earnings before interest and tax- es) and it is declared in the income statement. Please find the exact interest conditions within your `environ- mental data´. The rate of interest for a long-term credit can be influ- enced by a rating.CAPM): . in order to keep it as simple as p ossible.1. bonds). is the result before interest and taxes.  Cost of equity For the cost of equity. Since the rate of return from the capital providers is dependent on the overall company success. At the beginning the interest expenditures do not diminish the result. 6. the cost of debt results from the amount of the obtained bank loans and the related interest conditions of the individual credit contracts. the higher is the rate of return expected by the equity investors. (e. From the company´s view this is the cost of equity. It depends on the risk and on the general interest development. This can be seen on the shareholders’ equity and liabilities side on the balance sheet. At MARGA the cost of equity is determined by three factors (affiliated from the so-called Capital Asset Pricing Model . The rate of return multiplied by the company´s equity results in the absolute amount expected by the shareholders.

the beta factor is calculated from the development of the MARGA Value Added (MVA) in comparison to the overall market development (average MVA of all four companies). then the invest- ment risk accords to the average market (ß = 1). yield on shares)  Beta factor ß (company specific premium loading for substandard risks). concerning an average market rate of re- turn which can be expected from a high-risk asset im (e. Please find the exact limit of the be- ta factor in your ‘environmental data’. Therefore. If the prices vary in a stronger or weaker manner. From period 2 onwards you have to anticipate a company-specific risk with either an additional charge or a discount. It shows how much the share prices of a company vary in comparison to the overall mar- ket.  Capital employed (CE) The calculation of the cost of capital includes only the equity and the liabilities on which the company explicitly has to pay interest. it is often referred to as capital employed (CE) and at MARGA it is calculated as follows: Equity + bank liabilities vs.7  Rate of return from a low-risk asset = ir  Additional premium for risk (im – ir). lower (ß < 1). credit institutions → capital employed (CE)  Weighted average cost of capital (WACC) Since the interest payment of the applied capital varies – equity capital is usually more expensive than borrowed capital. In practice. This results into the following: Cost of equity → ir + ß x (im – ir) Average market values are applied for the rate of return of low-risk assets as well as for the additional premium for risk resp. The corresponding data can be found in the ‘environmental data’. If the prices vary just in the same way as on the market.g. one must also consider the varying conditions of the credit institutions . the yield on shares. and with borrowed capital.a rate of capital charges . it is always known at the time of planning the calculation of capital resources. then the risk can be accordingly estimated as higher (ß > 1) resp. The MARGA company has no share prices available for the evaluation of the beta- factor. Since the beta factor is always calculated (from previous data) for the subsequent period. At the beginning the beta factor equals 1.

depending on its financial structure and the estimation of risk. Weighted aver- age cost of capital). Cost of capital  CE x WACC 6. but also relatively by the ROCE (return on capital employed).  Calculation of the cost of capital The cost of capital results from multiplying the capital employed (CE) with the weighted average cost of capital (WACC). Return on capital employed (ROCE) The success of a company cannot be measured only by the MARGA Value Added as an absolute factor. It is calculated as follows: WACC → rate of equity x equity ratio + interest on debt x debt ratio There is a differently weighted rate of equity for each company.8 is weighted by the equity capital and the borrowed capital (WACC. An increase of company value exists when the ROCE exceeds the WACC: ROCE > WACC.3. ROCE  EBIT / CE .

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