Your parent company's tax bill is based on consolidated income, rather
than only the income in the home area. Taxes paid by subsidiaries
constitute a credit to the parent company tax bill. Current period
income is reduced by a tax loss carry-forward, if any, from the
The calculation is easy to see when there is a consolidated net loss, as you had in Year 3, Quarter 1.
Consolidated Net Loss Before Tax $-101 Less Income Tax paid by subsidiaries - 60 Net Loss after tax $-161Note that this is not the same as the loss in Area 1 ($-206), attributed to the parent company. The subsidiaries paid $60 tax on $154 income (60/.39). This income, already taxed to the subsidiary, reduces the consolidated loss. Adding it back establishes the tax loss carry-forward for the parent:
Consolidated Net Loss Before Tax $-101 Less Subsidiary Income already taxed -154 Parent tax-loss carry-forward $-255Then, in Year 3, Quarter 2,
Consolidated Net Profit Before Tax $ 188 Less tax loss carry-forward -255 Consolidated Taxable Income $ -67 Taxes paid by subsidiaries -85 Less subsidiary income -218 Parent tax-loss carry-forward $-285Note that there is a tax loss carry-forward, even though there was a profit of $207 in Area 1, due to the loss in Sereno.
Consolidated Net Loss Before Tax $-138 Less tax loss carry-forward -285 Consolidated Taxable Income $-423 Taxes paid by subsidiaries -101 Less subsidiary income -259 Parent tax-loss carry-forward $-682In Year 3, Quarter 4 there was a consolidated profit
Consolidated Net Profit Before Tax $ 437 Less tax loss carry-forward -682 Consolidated Taxable Income $-245 Taxes paid by subsidiaries -226 Less subsidiary income -579 Parent tax loss carry-forward $-824During Year 4, your firm had a consolidated net profit each quarter, including untaxed profits in Sereno (not taxed because of a peso tax loss carry-forward). It may be instructive for you to "do the sums" for the first three quarters of Year 4. At the end of Quarter 3, the tax loss carry-forward was $169 thousand.
Consolidated Net Profit Before Tax $1456 Less tax loss carry-forward -169 Consolidated Taxable Income $1287 Tax at 39% 502 Less taxes paid by subsidiaries -370 Net tax bill for parent company $ 132
2. Depreciation expense
To calculate depreciation expense per quarter for equipment: What is the depreciation ($ or P) amount for equipment in Sereno?
Equipment depreciation is covered in more detail on pages 111-112 of the BPG Player's Manual.
Is maintenance expense subject to inflation?
4. ROI calculation
On page F1 of the Quarterly Industry Report, we are curious as to how "Investor ROI" is calculated. How might we estimate future ROIs? Can you please enlighten us?
10. Cash management
Last year teams had significant troubles with cash management in the
later stages of the game. The industry appeared to still be in
significant growth stages at the end of the competition. Our
understanding of cash management and dividend policy is that rapid
growth industries typically do not issue frequent dividends - the cash
should be reinvested to strengthen the position of the firm. However,
last year the teams with exorbitant amounts of cash at the end were
issuing large dividends each quarter.
This seemed to help their stock price immensely, though as a policy it doesn't seem to match what we have learned. Is this a symptom of the simulation? Or is there some better way to manage our cash, should we be in the same situation this year?
Dividends paid by subsidiaries to the parent are described in the Player's Manual on page 130. Until the retained earnings have been built up to at least 50% of the value of common stock, only 80% of earnings are paid to the parent company. After that, all profits are paid to the parent as dividends.
Dividend payments to the parent are subject, of course, to the availability of cash in the subsidiary's bank account--after payment, there must still be one million pesos in the Sereno subsidiary, or $100,000 in Merican subsidiaries.
The parent company's account "Dividends from Subsidiaries" reflects
how much is received by the parent and the sum of subsidiary dividends
paid to the parent should equal the amount of "Dividends from
Subsidiaries." As Internal transfers, these amounts net out and do
not show on the consolidated statements.
12. Credit rating
During quarter 4, year 3, our credit rating fell to level 3, along
with the rest of our world. We would like to question the reasoning
behind this. We had a credit rating of 2 prior to fourth quarter,
when we had the high sales in the industry at 5.1 million dollars, and
we ended with the highest cash balance of 983,000 dollars with no
loans. We are hoping this was a fluke and can be appealed. We have
worked very hard to manage our finances as we have made long term
improvements to our plant and product. What has happened to our
credit rating? We were hoping for, and honestly expecting, our credit
rating to move to 1 very soon.
Your company certainly met repayment obligations and had no emergency borrowing, and from the Annual Industry Report showed an increase in market share of about 1.6 percentage points. You might wish to check out the other factors noted on page 57 in relation to general industry standards and other companies in your industry. For example, no one in your industry paid any dividends during the year. Your debt ratio (bonds/equity) exceeded the maximum permitted by your bond indenture. Partly as a result of the high amount of long-term debt, your interest coverage ratio is a little low by most industry standards. Please consider each of the factors listed.
And remember that credit rating is not the only measure to judge business success. It does affect your borrowing costs and ability to raise funds with new stock offerings.