Tower46 LLC www.tower46.com

1. FORAD Multinational Business Finance Simulation Business School Course Tower46 LLC www.tower46.com

2. Agenda • Executive summary • Why use this product? • The FORAD simulation: • FORAD company structure and details • Decisions process • Share price calculation • Simulation process • Reporting and reviews • The FORAD company decisions - details • Learning points • The FORAD simulation – management and logistics

3. Summary - what is the FORAD simulation? The FORAD BUSINESS FINANCE SIMULATION is a computer based game designed to help the students, usually in teams of 3 to 6, understand what it takes to manage the financial and operational challenges of a multinational corporation. The company operates in a challenging market environment and competes with the rest of the FORAD companies. The management of the company involves DECISIONS in the areas of forecasting, operations and budgeting, choice of financing options, risk management and international taxation strategies, shareholders’ relationship. The focus is on corporate finance decisions. The teams’ PERFORMANCEis measured by the company’s share price which depends on the earnings per share achieved and a combination of a number of performance measures which include credit rating, success in risk management, effective tax rate, quality of earnings, other. The performance depends on the users’ ability to understand the key corporate finance concepts and apply those lessons in managing a complex organization in competitive and unpredictable MARKET ENVIRONMENT – subject to the simulation The software provides the users with detailed REPORTING and a number of other DATA TOOLS to help their decisions and review processes.

4. How does this product improve the course? The FORAD simulation makes the course more effective by teaching important lessons , further enhanced by the way the learning is delivered: • The simulation presents multiple key finance concepts (capital structure, capital costs efficiency, operating analysis, capital budgeting, valuation are just examples) and therefore is suitable for a wide range of traditional finance courses. • Regardless of the course focus, it allows the users to also see “the big picture” about managing multinational corporation and examine how certain decisions affect multiple areas of the company. • It challenges the users to address variety of trade-offs – equity vs debt financing; ST vs LT debt; conservative versus aggressive risk management are just a few of many. W H A T H O W • The game format replicates the real world and adds another layer of complexity to the learning experience – unpredictability of the market and the competitors’ behavior. • It gives the users the chance to experiment with their decisions and try unlimited number of combinations and iterations to test the lessons learned in the classroom.

5. How does this product help the instructor? Additional benefits for the course instructor: • The FORAD company structure and the simulation performance and results could be used as semester-long case for class discussions. • Adjustments to established course schedule are not a requirement and depend only on the instructor’s preference – the FORAD simulation could be simply an addition to the class and the learning points focus could be aligned with the class objectives. • The addition of the FORAD simulation does not require major time investment to advise the teams – the players’ manual includes all details needed. If requested, interpretation of the results and other supporting materials can be provided by the Tower46 teams. • The competition element increases the students’ engagement and interest in the class. Performance in the simulation can be used as additional objective assessment of the students’ success in understanding the course material.

6. The FORAD simulation – details Tower46 LLC www.tower46.com

7. The FORAD Company structure Shareholders: Equity; Dividends Banks: LT/ST loans; FX hedging instruments U.S. Holding Company IC loans and dividends IC loans and dividends Consolidated FORAD Company IC trade Japan Operational Subsidiary Germany Operational Subsidiary Clients: Domestic sales; International sales Clients: Domestic sales; International sales Banks: LT/ST loans; FX hedging instruments Banks: LT/ST loans; FX hedging instruments IC: Inter-company ST: Short-term LT: Long-term

8. Decisions process Multiple steps, but no formal flow or limit for the desired iterations Preparation - analyze company’s results, study competitors results; forecast the market data; set goals and plan the current period Operations – decide capacity and production levels, looks for ways to improve revenues and profitability Financing and investing – review the company needs or excess resources; borrow or repay debt, decide on maturity and currency, issue equity or buyback shares Tax management – search for opportunities to lower corporate tax rate – via IC loans, transfer pricing, IC dividends FX management – review the exposures and decide on the hedging approach Review – examine expected results, stress test for unexpected market data, think for ways to increase EPS and/or PE score, adjust the decisions

9. FORAD simulation process Team 2 Decision Team 1 Decision Team N Decision The teams submit their decisions files to the Administrator During the simulation, the teams’ predictions for market data are replaced with the market actuals and teams’ results are recalculated S I M U L A T I O N The teams receive their final results with complete detailed reporting package and can proceed with the next period decisions Team 1 Results Team 2 Results Team N Results The teams also receive companies’ rankings, selected data for the competitors and economic commentary forecast for the next period Industry summary Next period forecast

10. The FORAD company share price calculation Share Price = Annualized Earnings per Share x Current PE score PE score elements, description and weights:

11. Reporting The model automatically generates multiple reports: PE scores by team by period • For the competitors and the industry: • Share prices, EPS, PE scores by company • Operations and production highlights • Consolidated financials of the competitors • Market data and forecasts • Individual teams’ detailed results: • Financial statements by subsidiary in local currency and in USD • All current and historical decisions and results by position – FX exposures and results, borrowings and investments, productions data, tax management • All reports are downloadable in Excel Share prices by team by period

12. Decisions and results review tools The model offers multiple tools for the users to review their results to enhance the learning experience Includes operations, financing, hedging, taxes, PE score elements, financial statements by subsidiary and consolidated At any time - access to the team’s historical decisions and results with all details included Decisions Details Historical Reports All reports can be downloaded in Excel and analyzed as desired or be a base for other independent modeling and reviews The users can enter extreme values for market inputs to explore the effects and test the decisions’ quality in such cases Excel Downloads Stress Tests

13. The FORAD company decisions Tower46 LLC www.tower46.com

14. Operations decisions Even though the FORAD teams have limited opportunities to influence the sales levels, operations decisions are crucial for the company’s profitability. Some decisions affect the company’s performance over long-term, others have immediate effect. Develop long-term strategy for capacity investments – given the trade off between having enough capacity on time and the cost of funds to purchase it Long-Term effect Decide how much to produce the current period to meet the demand, but also whether to build inventory for the near future to minimize the costs Mid- Term effect Decide on each period’s collection and payment terms to optimize the revenues and the cash needs. Decide on the collection currency and Inter-company trade details. Short-Term effect

15. Financing decisions Cash needs: Based on the operational decisions and predictions, the model estimates the cash needs by subsidiary on a few key days within the period – day 0, 30, 45, 60 and 90. • Available capital and investments: • Debt - fixed and floating rate Long-term (LT) loans in the subsidiary local currency; Short-term (ST) loans in all three currencies; Inter-company (IC) loans in USD • Equity - the Holding company can issue equity from the shareholders and repurchase shares • Swaps - the teams can enter into plain vanilla interest rate swaps for their LT debt positions • Marketable debt securities – the teams can invest excess cash in marketable debt securities Equity; LT/ST loans; Swaps; Marketable securities LT/ST loans; Swaps; Marketable securities LT/ST loans; Swaps; Marketable securities IC loans IC loans US Holding Company German subsidiary Japanese subsidiary Effects: These decisions affect corporate structure and credit worthiness, interest rates management results, FX exposures and effective corporate tax rate.

16. Foreign Exchange Hedging decisions Foreign Exchange Exposures Foreign Exchange Hedging Instruments Foreign Exchange Results • Given the operational decisions, the teams can review the FX exposures by type, by subsidiary and by currency: • Trade exposures – receivables and payables • Financial exposures – ST and IC loans • Exposures from IC dividends • Hedging instruments available: • Forward contracts • Options contracts • Operational and finance decisions to adjust the exposures • Both hedging and speculative positions are allowed. • The model calculates expected FX gains and losses by position: • From the underlying exposures • From the hedging and speculative positions • The gains and losses are based on the teams’ predictions for the period end FX rates.

17. Tax management decisions To optimize the corporate effective tax rates, the FORAD teams take decisions on three main items: Influence the profitability of the two operational subsidiaries with different income tax rates by changing the transfer price for the Inter-company trade relationship, the currency of invoice and the pay terms. Transfer Pricing Minimize the subsidiaries income tax rate by paying Inter-company dividend to the US Holding company at the optimal payout ratio. Minimize the net foreign tax credits and deficits. Inter-company Dividends Another way to influence the subsidiaries’ profitability – by using Inter-company loans to transfer funds within the company and charge the best from tax perspective rate. Inter-company Loans

18. Learning points Tower46 LLC www.tower46.com

19. Learning points – Finance skills The FORAD simulation allows the users to build skills in multiple areas of corporate finance – very helpful for any well rounded finance professional, and therefore, crucial for success at the work place Risk management • Identify, understand and manage risk exposures – those resulting from volatility in the foreign exchange rates, interest rates, commodity pricing • Use economic commentaries to develop market forecasting process • Learn how to use various hedging instruments and structures Corporate structure and capital markets • Define corporate structure and manage credit worthiness • Choose between multiple sources of capital available – equity capital, short-term and long-term fixed and floating rate debt • Refine the details – currency, duration, type, risk profile • Learn to evaluate the strategy and how to adjust, if needed

20. Learning points – Finance skills – continued • Use market data to forecast the sales and structure company’s operations accordingly • Manage the company budget for long-term assets (capacity) and med-term assets (inventory) • Understand the long-term effects and plan beyond the current period Financial planning and analysis International taxation • Learn about the differences in the local tax rules ad rates • Test the various tools available to a multinational corporation to achieve better tax efficiency • Learn how to read and explain the numbers after they have been already generated • Get the opportunity to review the historical results and examine the trends Financial statements analysis Competitors’ analysis • Learn how to use limited publicly available data for the competitors to draw conclusions for their strategy ad make adjustments to be more competitive

21. Learning points – Managerial and Organizational skills The FORAD simulation also allows the users to build skills in areas outside of corporate finance – to complete the overall training experience Management Skills • See the big picture about managing a complex organization and how certain decisions effect other areas too • Acknowledge and manage trade-offs and learn to prioritize and focus • Learn to evaluate performance, identify mistakes and recover • Accountability – take ownership of the decisions and defend them to the public, develop and follow internal rules • Time management – deadlines in FORAD are similar to the deadlines in the real world and require tight organization • Team dynamics – success in FORAD is nearly impossible without effective team with quality discussions and team commitments • Communication skills – learn to communicate and negotiate within the team, but also when presenting the company’s decisions and results Organizational Skills

22. The FORAD simulation – management and logistics Tower46 LLC www.tower46.com

23. Performance assessment The competition gives the instructor multiple tools to objectively rank and evaluate the students’ performance. All are optional and could be customized. • Highest share price at the end of the simulation: • Highlights a team with solid profit and also success in the majority of the PE score elements. Other benchmark are an option too – market cap, specific element of the PE score, FX results, only operating profit or only non-operating profit, others. 1 + • Written reports: • Allows the teams to review and analyze their performance again and reflect on the lessons learned. Could be structured similarly to US public company regular filings to practice reporting skills . 2 + • Presentation and Q&A session with a panel of judges (other instructors, professionals): • Further enhances the learning power of the game; the event could be open for everybody interested and increase the course popularity and the students’ visibility. 3

24. Suggested simulation schedule • FORAD simulation game could be run along side a semester-long course: • Stage 1 - pre-game and first decision (2-3 weeks) – form teams, distribute the players manual and allow the teams to get to used to the software and the rules when preparing their 1st period decision • Stage 2 – core game (6-7 weeks) – allow a week for each period decision • Stage 3 – final results and debrief (2-3 weeks) – distribute the final results; allow the teams to prepare their final reports, presentations and decisions defenses, if used

25. Responsibilities • Tower46 team: • Technical support • Support for all financial calculations and assumptions used in the model • Training for the instructor and administrator manual if used • Help with the students’ questions, if needed • Recommendations and best practices • Class Instructor: • Primary contact for the students - form teams, distribute the materials, answer questions • Post each period results • Evaluate the teams’ overall performance • Incorporate the learning points in the course goals • Class Instructor or Tower46 team: • Administer the simulation process • Create scenario for the simulation and the supporting market commentaries • Interpretation of each period results Instructor’s choice

26. Logistics and other details • Possible game formats: • Semester-long course with decisions due weekly • Intense short course with decisions taken each day (usually for executive education) • Teams and users - no fixed requirement for the number of teams or team members. 3 to 5-member teams offer good balance between work load and efficiency and 5 to 10 teams provide the best competitive environment. • Length – the simulation could continue between three and 20 periods, ideal results are achieved between 5 and 8 periods. • Location - the learning experience is most effective when teams discuss their decisions and results together, but they do not need to be physically at the same location and could work remotely. • Administration – could be administered by the course instructor (brief training would be needed) or remotely by Tower46 member. In all cases – interpretation of the results and help with any questions from the users will be provided by the Tower46 team. No specific technology requirements. • Documentation: • Manual for the users with all details to play the game; no additional training required • Manual for the Administrator, if needed • Ready to use market scenarios with economic commentary packages; customization of the scenarios is an option