MARGA Quick Guide

learn to win.
 MARGA Quick Guide

1. Introduction 1
2. Your company objective 1
3. Products and markets 2
4. Decision-making fields 2
4.1. Decision area `Marketing‘ 3
4.2. Decision area `Production and logistics‘ 4
4.3. Decision area `Finance and administration‘ 4
5. Controlling 5
6. Calculation of the value proposition – MARGA Value Added 5
6.1. Result 6
6.2. Cost of capital 6
6.3. Return on capital employed (ROCE) 8

BE A TEAM.
BE SUCCESSFUL.
BE AN ENTREPRENEUR.
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1. Introduction
First of all, congratulations on your appointment to the MARGA management board. The
previous management failed in differentiating the company from its competitors. This is
the main reason why the previous management was replaced. All companies have the
same prices, sales, market shares, etc. and therefore start into the first period from an
identical ‘initial situation’.

This manual is a quick guide on the main simulation rules. A more detailed explanation of
all functions can be found in the simulation software.

2. Your company objective

The overall objective of the simulation is to increase the value of your MARGA company.
Your key success figure is the so-called MARGA Value Added. 1

Figure 1: Measurement of success

The starting point is the capital that is invested in your company. It can be divided into
equity and liabilities. Both groups of investors receive an additional payment for investing
their capital into the MARGA company. The equity investors will receive part of the
business profits, whereas the outside creditors (e.g., banks) will receive interest on the
capital borrowed. Both the cost of equity and the cost of borrowed capital (i.e., cost of
debt) add up to the cost of capital which a company has to carry and earn to be profitable.

1 The calculation of the MARGA Value Added is explained on page 5.

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All additional company earnings signify an extra value. If the company’s profits do not
cover the cost of capital, thus value is destroyed.

At the end of a round, the winner is the company which has created the highest company
value (accumulated value propositions of all periods in one round).

3. 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, Americas and
APAC).

Product 1 is a ‚consumer good‘, that was launched on the market some time ago and
which is firmly established in most markets. It looks as if the times of high
market growth are over.

Product 2 is a new 'service product' just going through its launch phase. The MARGA
managers attached great importance to pushing the product on the market
quickly. At present the consumers are not yet familiar with your new
product.

Product 3 is a new ‘capital good’. It has been launched successfully to a specialist tar-
get group and is at the beginning of its growth phase. Product 3 as a capital
good is sensitive to economic cycles.

4. Decision-making fields
You manage your MARGA company by using an integrated planning tool, the MARGA soft-
ware. 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, i.e., annual reports, cost accounting information, competition analysis tools, etc.
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4.1. Decision area ‘Marketing’

Following a market-based approach, your planning procedure should start with marketing
and sales. 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, and the planned sales
volume. For each product, you have to set up a budget for research and development
(R&D), and for each region, you have to set up a sales force budget. Therefore, your mar-
keting mix is a combination, specific to product and region, 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.

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- budget for mar- budget for mar- budget for mar-
ket 1 ket 2 ket 3 ket 4

Detailed information about this decision area can be found in the MARGA software.
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Besides the markets, you have the option to participate in a public call for tender when indi-
cated. In case you wish to participate, you need to make a price offer to get this additional
order.

4.2. Decision area `Production and logistics‘

Based on your sales plan you will have to decide on the production amount of your three
products. For the production, you will require three main resources:

1. Machines: You use three different machine types which have to be operated at differ-
ent capacity factors for each product. The software informs you about setup and use
of your machinery, about capacity utilization and maintenance costs, about invest-
ment options and the impact of disinvestment (`Environmental data’ as well as Online
support / Help). The current utilization status and the capacity level of your company
can also be found in the ´environmental data´.

2. Your workforce – skilled and unskilled workers – is the second manufacturing re-
source. For each product, you need a certain number of both unskilled and skilled
workers. Hence, you decide on recruitment and dismissals of personnel, about effi-
ciency and how to handle peak capacity, about personnel training, fringe benefits
and the allocation of temporary workers.

3. The amount of raw materials needed for the production; you need two different
types of raw materials which you can order from your supplier. Instead of ordering
actively you may also use a Supply Chain Management tool, which automatically
orders the exact amount you need. In this case the raw materials are delivered
just-in-time directly to your assembly line, and no storage is needed. Information
about the conditions can be found in the MARGA software.

In addition to producing by yourself, you may outsource parts of your production. In this
case an external supplier delivers trade goods to you.

4.3. Decision area ‘Finance and administration‘

The focus of your financial planning is the liquidity management. After you have decided
on marketing and production, you should control your cash balance (see planned balance
sheet under ‘Controlling’). Based upon this, you may decide to take out a bank loan or to
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pay dividends to your shareholders. 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. Additional cash can be invested in the capital market.

5. Controlling
Compared to reality, the rules for the MARGA annual financial statement have been
strongly simplified concerning various details, to allow a quicker and easier access to the
company cost accounting. You can find the balance sheet, the income statement as well as
the cash flow statement in the MARGA software under `Controlling’ (‘results report’ as
well as ‘financial reports’).

The balance sheet is a comparison at a certain due day, which on the one hand shows the
company’s assets and on the other hand its provided capital (shareholders’ equity and
liabilities).

The income statement elaborates more in detail how the period result has developed.
The earnings and expenditures of a business period are compared. With the so-called cost
of sales accounting, MARGA only considers those expenditures which occurred for the
quantity of products sold in the very period.

Therefore, the income statement is used for the income calculation within one period,
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.
You will find the financial condition i.e. the cash balance on the balance sheet (see current
assets).

6. 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). If it is positive, the company has
created value; if the MARGA Value Added is negative, value has been destroyed. At the
end of a round, the winner is the company which managed to accumulate the highest
MARGA Value Added throughout all periods.

MARGA Value Added → Result – cost of capital

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The following section points out which result value is used and how the cost of capital is
calculated in detail.

6.1. Result
At MARGA the result, which is the basis of the calculation of the value proposition, is the
result before interest and taxes. It is referred to as EBIT (earnings before interest and tax-
es) and it is declared in the income statement. At the beginning the interest expenditures
do not diminish the result, because they are subtracted separately from the cost of capi-
tal. The value is considered before tax, in order to keep it as simple as p ossible. The com-
parison of the accumulated value propositions does not lead to a falsification of contest,
since all companies are paying the same rate of taxes.

6.2. Cost of capital

The cost of capital is composed of cost of equity and cost of debt. This can be seen on the
shareholders’ equity and liabilities side on the balance sheet. The interest calculation of
equity and debt is varying. Please find a more detailed explanation below:

 Cost of debt
At MARGA, the cost of debt results from the amount of the obtained bank loans
and the related interest conditions of the individual credit contracts. There is a
clear differentiation between short-term and long-term credits as well as to ex-
traordinary balancing loans. The rate of interest for a long-term credit can be influ-
enced by a rating. Please find the exact interest conditions within your `environ-
mental data´.

 Cost of equity
For the cost of equity, the rate of return expected by the equity investors is rele-
vant. It depends on the risk and on the general interest development. The higher
the risk, a company is faced with, the higher is the rate of return expected by the
equity investors. The rate of return multiplied by the company´s equity results in
the absolute amount expected by the shareholders. From the company´s view this
is the cost of equity.
Since the rate of return from the capital providers is dependent on the overall
company success, (e.g. share value) and this, of course, hides a rather high risk, it is
self-evident that in this case the rate of return is higher than in the case of low-risk
assets (e.g. bonds). At MARGA the cost of equity is determined by three factors
(affiliated from the so-called Capital Asset Pricing Model - CAPM):
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 Rate of return from a low-risk asset = ir

 Additional premium for risk (im – ir), concerning an average market rate of re-
turn which can be expected from a high-risk asset im (e.g. yield on shares)

 Beta factor ß (company specific premium loading for substandard risks). It shows
how much the share prices of a company vary in comparison to the overall mar-
ket. If the prices vary just in the same way as on the market, then the invest-
ment risk accords to the average market (ß = 1). If the prices vary in a stronger
or weaker manner, then the risk can be accordingly estimated as higher (ß > 1)
resp. lower (ß < 1).

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 yield on shares. The corresponding
data can be found in the ‘environmental data’.

The MARGA company has no share prices available for the evaluation of the beta-
factor. Therefore, 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). Since the beta factor is always calculated
(from previous data) for the subsequent period, it is always known at the time of
planning the calculation of capital resources. At the beginning the beta factor
equals 1. From period 2 onwards you have to anticipate a company-specific risk
with either an additional charge or a discount. Please find the exact limit of the be-
ta factor in your ‘environmental data’.

 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. In practice, it is often referred to
as capital employed (CE) and at MARGA it is calculated as follows:

Equity + bank liabilities vs. 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, and with borrowed capital, one must also
consider the varying conditions of the credit institutions - a rate of capital charges
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is weighted by the equity capital and the borrowed capital (WACC, Weighted aver-
age cost of capital). 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, depending on its
financial structure and the estimation of risk.

 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).

Cost of capital  CE x WACC

6.3. Return on capital employed (ROCE)

The success of a company cannot be measured only by the MARGA Value Added as an
absolute factor, but also relatively by the ROCE (return on capital employed). An increase
of company value exists when the ROCE exceeds the WACC: ROCE > WACC.

ROCE  EBIT / CE
MARGA Business Simulations
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50374 Erftstadt
Germany
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info@marga.net
www.marga.net