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StratSim – Financing Decisions: A Practical MBA Guide

1. Introduction to Financial Management in StratSim

In StratSim, you manage a company that requires financial resources both to sustain ongoing operations and to fund strategic investments. The primary objective is to generate sufficient cash flow from operations. However, you also have the option to raise external capital through debt or equity issuance.

These financing choices are made through the Financing Decisions screen, where you can manage:

• Cash and short-term investments

• Equity financing (stock issuance or repurchase)

• Dividend payments

• Debt management (short-term and long-term)

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2. Understanding Cash Management

2.1 Interpreting Cash Figures

At the start of a simulation year, you might observe a discrepancy between:

• Cash on the Financing screen: e.g., $3 billion

• Cash on the Pro Forma Balance Sheet: e.g., $10.588 billion

This difference is explained by the cash flow projections for the current year. The cash on hand reflects beginning-of-year cash. When combined with the projected net increase in cash (e.g., $7.395 billion), the total aligns with the year-end projection in the balance sheet.

Practical Tip: Always distinguish between actual current cash and projected year-end cash on pro forma statements.

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2.2 Investing Excess Cash in Certificates of Deposit (CDs)

If you have surplus cash that will not be used during the year, you can invest in a 1-year CD (Certificate of Deposit).

Steps:

1. Enter the amount (e.g., $1 billion) in the CD investment field.

2. Click Save.

Outcome:

• The CD is recorded as a cash-equivalent asset on the balance sheet.

• It appears as an investment purchase on the cash flow statement.

• Cash does not decrease on the screen but is reclassified.

Academic Insight: CDs offer a risk-free return and are ideal for idle cash. They enhance return without altering risk exposure.

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3. Managing Equity Financing

3.1 Issuing New Stock

Issuing new equity can provide substantial capital without incurring debt.

Steps:

1. Enter the amount (e.g., $1 billion) in the stock issuance field.

2. Click Save.

Effects:

• Cash increases on the balance sheet.

• On the balance sheet:

  • Common stock increases by par value (e.g., $10 million at $1 per share).

  • Additional paid-in capital increases by the remainder (e.g., $990 million).

• On the cash flow statement, it appears as a sale of stock.

Use Case: Suitable when pursuing aggressive growth without increasing leverage.

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3.2 Repurchasing Stock

You may use excess cash to repurchase shares, often a signal to the market of confidence and to boost Earnings Per Share (EPS).

Steps:

1. Enter a negative value in the stock field (e.g., -$500 million).

2. Click Save.

Effects:

• Cash decreases.

• Treasury stock appears as a negative equity item on the balance sheet.

• On the cash flow statement, it’s shown as a cash outflow from financing.

Strategic Note: Use buybacks when stock is undervalued or if you aim to optimize capital structure.

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4. Dividend Policy Management

Dividends provide returns to shareholders but reduce retained earnings and cash reserves.

Steps:

1. Enter a dividend value (e.g., $500 million).

2. Click Save.

Effects:

• Cash decreases by the dividend amount.

• Retained earnings are reduced accordingly.

• Appears as dividends paid on the cash flow statement.

Best Practice: Maintain a stable dividend policy. Avoid overcommitting cash that may be needed for operations or investment.

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5. Debt Financing Decisions

5.1 Understanding Short-Term Debt

Short-term borrowing occurs automatically if you face a cash shortfall at year-end.

Mechanics:

• StratSim ensures obligations are met by borrowing what’s needed plus a buffer.

• The debt is technically “paid off” annually but will recur if cash flow remains negative.

Risks:

• High interest costs (e.g., 7%) can compound.

• Repeated shortfalls signal poor cash management.

Warning: Relying on short-term debt is unsustainable. Use it only for temporary mismatches in cash flow.

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5.2 Issuing Long-Term Debt

Issuing long-term bonds can:

• Finance capital projects.

• Refinance expensive short-term debt.

Steps:

1. Enter the desired amount (e.g., $1 billion) in the long-term debt field.

2. Click Save.

Effects:

• Cash increases.

• Bonds payable increases on the balance sheet.

• Appears as bond issuance in the financing section of the cash flow statement.

Advantages:

• Lower interest rates (e.g., 5% vs. 7% short-term).

• Fixed 10-year term.

• Bonds are callable after 3 years.

Strategic Tip: Consider refinancing short-term debt with long-term bonds for cost efficiency.

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5.3 Calling Existing Bonds

If past bonds become callable, you may repay them early.

Steps:

1. Check the box to call bonds.

2. Click Save.

Considerations:

• Interest for the current year is still paid.

• Reduces long-term liabilities and interest burden in future years.

Best Practice: Call bonds only if you have surplus cash and better use of funds (e.g., reinvestment at higher returns or cost savings).

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6. Pro Forma Financial Statement Analysis

Every financing action in StratSim reflects on three major pro forma statements:

• Balance Sheet:

  • Tracks cash, CDs, stock equity, debt, retained earnings, and treasury stock.

• Cash Flow Statement:

  • Classifies financing activities such as stock sales, bond issuances, dividends, and repayments.

• Income Statement (indirectly):

  • Interest expenses affect net income due to changes in debt levels.

MBA Skill: Learn to trace the ripple effect of financing decisions across all statements.

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7. Final Recommendations

Financing Tool	When to Use It	Risk Level	Strategic Purpose
CD Investment	Surplus cash, no immediate need	Low	Improve returns on idle cash
Stock Issuance	Growth capital needed, stock fairly valued	Moderate	Expand equity without adding debt
Stock Repurchase	Excess cash, boost EPS	Moderate	Signal confidence, optimize equity base
Dividends	Stable profits, mature business	Moderate	Reward shareholders
Short-Term Debt	Emergency cash shortfall	High	Temporary liquidity solution
Long-Term Debt	Capital investment or refinancing needs	Moderate	Long-term funding at lower cost

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8. Additional Learning Resources

• StratSim Student Manual – In-depth descriptions and formulas.

• PRISM Case Study Guide – Strategic implications of financial choices.

• Simulation Debriefs – Post-round reviews to analyze financial performance.

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Conclusion

Effective use of the Financing Decisions screen in StratSim is essential for financial sustainability, strategic execution, and shareholder value creation. By mastering these tools, you’ll gain real-world insights into capital structure management, cash flow planning, and financial strategy execution—key competencies for any business leader.

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