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Deutsche Brauerei Essay

2540 words - 11 pages

Introduction:
Greta Schweitzer requires assistance in determining how the company, Deutsche Brauerei should best proceed in the future, to achieve optimum financial results. Specifically, Schweitzer needs to consider what her position is on adopting the company’s financial projections for the future, the firm’s dividend policy and the compensation package that should be offered to the leader of international expansion, Oleg Pinchuck. There are other areas of Deutsche Brauerei’s operations however, that it appears worthwhile for Schweitzer to assess. These include Deutsche Brauerei’s practise of taking on excessive short-term debt, and the subsequent effect that has on the firm’s working ...view middle of the document...

Although the facts of the case state that some of the older shareholder’s rely on their dividend payment as their sole source of income, it should be clearly explained to them that investing additional funds into company expansion will most likely benefit them significantly in the long term. Sensitivity analysis of the amount of dividends being paid to shareholders indicates that as the dividend payment increases, so does Deutsche Brauerei’s bank borrowings. Consequently the firm’s working capital decreases in both the projected years of 2001 and 2002 if the dividend payment of Deutsche Brauerei continues to grow as a percentage of earnings. The large dividend payout also has adverse effects on net profit after tax and retained earnings, as indicated by the provided sensitivity analysis.
It is assumed in finance that when a company decreases its dividend payments, shareholders will consider this to be a negative sign that the business is suffering. Subsequently, they will wish to sell their shares in the business and the overall share price will be reduced. Deutsche Brauerei is in an advantageous situation in this case however, because of the nature of the family run business. Family members are far less likely to abandon their stake in Deutsche Brauerei, if their dividend payment decreases because of their personal attachment and moral obligation to the company. This being said, we wish to propose the dividends for 2001 and 2002 do not continue at 75% of sales. Rather, the dividend payment should be frozen at the 2000 figure of €2,186,000 (see Exhibit 4.) This should continue to satisfy the older family members financial requirements, while concurrently allowing a greater proportion of the profit being generated by Deutsche Brauerei, to go towards their expansion costs. Furthermore, Deutsche Brauerei will not need to continue to take on as much short term debt to enable them to meet their previously over indulgent dividend repayment percentage. Deutsche Brauerei would benefit by reinvesting their earnings back into the company to grow the company, as opposed to repaying such a substantial dividend. The expansion of the business into Ukraine can be used as an example. A key figure to indicate this is that by 2002 (the fourth year Deutsche Brauerei has been selling somewhere other than their domestic market), the Ukraine will comprise 41% of the company’s revenue, whilst maintaining the same margins as the domestic market. The current downside is the foreign exchange rates, but this can be hedged against.
We do not wish to ignore the retiree’s needs however, as the dividend payment constitutes their entire income. Due to inflation, the purchasing power of the set dividend will decrease annually. We propose that we need to monitor the growth in sales in Ukraine. When they begin to become more constant and consequently require less financial support for expansion purposes, the set dividend payment should grow in proportion with inflation....

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