Deutsche Brewery Question and Answer
1. What accounts for Deutsche Brauerei’s (DB) rapid growth in recent years? What strategic choices were made? The Ukraine account grow rapidly in the recent years. The strategic is just expanding, more focus on the sale/volume, not on how to turn the order to money. It can be understood that the local distributors need some policy support from DB, because they just start, still at the beginning of capitalization period. The current credit policy is applicable for the starting phase, but long term it needs to be adapted (e. g annual bounce on the pay on time accounts).
Meanwhile because of fast expansion, more investments on the Assets in Ukraine is needed. The financial plan includes a 7 million euro investment in new plant and equipment for the Ukrainian operations in 2001, followed by a 6. 8 million euro investment in 2002 for a new Ukranian warehouse and distribution center. Which is reasonable, but need more detail plan/business case before make the decision. I would say, half of the amount should be financed by Ukraine team itself, if they are able to turn the account receivable to cash. 2.
What is the credit policy for DB for distributors in the Ukraine? Why is it different from other sales? Is it appropriate (examine the business models in both instances). The credit policy for Ukranian distributors from 2 percent 10, net 40 to 2 percent 10, net 80 (clients could take a 2% discount if payment was made within 10 days of the invoice, otherwise payment was due in full within 80 days). The credit policy for Ukranian distributors differed because Ukrainian entrepreneurs, who are ambitious to grow but without support from the bank as in Germany.
The credit policy for the Ukranian distributors is applicable, which can support the distributor to expand, buy new equipment, and required more time than usual to pay. Also is a good investment for DB to build up the relationship with the distributor and meanwhile invest for the futurn. But on the other hand, long payment turn cost bad cash flow. In Ex1, the account receivable increase a lot, which 3. Why does this profitable firm need increasing amounts of debt? If the company wants to expand, they need cash.
It seems that DB is profitable, but because of the big account receivable, which cause actually cash tie-up. In order to still keep expanding, DB have to increasing amount of debt for investing. 4. Something about dividends: The quarterly dividend proposed is 698,000 euro, an amount equal to 25% of the projected 2001 dividends (2,793 k). However, this dividend increase is based on projected earnings, and several factors affect whether those earnings. Better to reserve a part of money till end of the year. . What should Greta do with respect to: the proposed raise for Pinchuk, the quarterly dividend and the financial plan for 2001? Regarding the credit policy for Ukranian distributors, Oleg argues that this process is profitable for the company. Actually, Ex1 in the base case shows accounts receivables in the Ukraine increased 30% from 1999 to 2000, and is projected to increase for the next 2 years (50% then 30% based on the previous year). Having a large amount of money tied up in receivables is risky.
My idea will be short the payment to 40 days, pay in 10 days will have even bigger discount 3-4%, meanwhile, if the account can pay all the bill on time (40 days), can get annul bounce (tbd). For the investment, I will be more careful, Although the data should the growth of sale and assent is not hand in hand. But because of the high debt/equity ratio, I will be more careful on the investment, avoid to have too high debt. We can try to work together with one or two local disctributors (e. g. Kiev, Odessa) to have JV project.
About the dividends, I will maybe go for 60% of earning, which mean 15% of the projected annual dividends for the quarterly pay. Just in case, if the actual data is not as good as predicted data, we still have enough cash to run the business. 6. Some observation of Ex4. Profitability: low return Leverage: high risk (high debt) Asset utilization: receiveables growth rate high longer payment. Difference between sale growth and asset growth. Sale Growth is much higher than assent growth, need to consider investment. Liquidity: short term financial commitment. Quick ratio is too high.
