Bayern Brauerei

TO: Prof. Cole

DATE: February 11, 2014

SUBJECT: Bayern Brauerei

SUMMARY AND RECOMMENDATIONS: We recommend that the firm to stick with its Bavarian roots and to maintain its current operations. The cost of expanding into Eastern Germany will significantly outweigh the benefits. In regards to upper management, the firm should remain family operated and dispose of Max Leiter for his unrealistic expansion plans.

BACKGROUND: Bayern Brauerei is a successful beer producer in Munich, Germany owned entirely by the Ober family. The firm is looking to expand to a new market in East Germany after the fall of the Berlin Wall, but must first address three existing issues or concerns.

KEY ISSUES:

* Issue 1: Forecasted 10 year cash flows and terminal value using only Eastern Lander sales in a projected growth of sales to be collected minus variable costs since fixed will be paid regardless. Tax was given and NPV was calculated including and excluding investments in east lander with depreciation of 25 years for PP&E and 40 for Warehouse.

* Issue 2: Terminal value was calculated using Built up WACC and the growth of sales to be collected.

* Issue 3: WACC was calculated using the build up method consisting of the Risk free rate, the return on debt and a 2% inflation rate. Beta was not possible to calculate.

* Issue 4: Change in Net Working capital was calculated as a percentage of total assets related to the 19% of sales in Eastern Lander and increased at projected sales collected growth.

* Issue 5: Net Present Value was discounted by WACC calculated above, resulting in a loss of DM13million with new PP&E or a NPV of $20 thousand.

* Issue 6: The Ober family’s target divided payout ratio of 75% is projected 3,471 / 4 * 75% = DM650,000.

* Issue 7: Compensation for Max should not be increased due to no growth and low NPV of growth related to East Lander.