Executive Summary on Deutsche Brauerei

Executive summary on Deutsche Brauerei

Although Pinchuk’s expected growth rate in revenue seems appealing, the risk factors such as increase in debt level, account receivable, required inventory build-ups and huge capital expenditure requirements make it unprofitable.

With the assumptions in Profitability of Ukraine Expansion part of the financial analysis report, the NVP of 2001 and 2002 OCF was higher when the firm keeps the growth rate to sustainable level of 3%.

This result is mainly due to the better management of account receivables and improvement of inventory conditions in Ukraine market. Since the lenient credit policies and building up of inventories in Ukraine market is aimed at maximising the growth in revenue, this requirement can be altered to benefit the OCF when the growth rate is readjusted to sustainable level.

In conclusion, Pinchuk’s advise on firm’s future growth is too risky and it should be dismissed.

Pinchuk’s extreme recommendation is the indication of the agency risk arising from his aim of maximising the sales in order to get the bigger bonus salary conflicting with the firm’s best interest to maximise shareholder’s value. Increasing his base salary and eliminating the bonus from increase in sales can relieve this agency risk. The new salary would have to be negotiated but should be around 800,000 euros.

Dividend pay out ratio does not need to be readjusted since the firm’s leverage position has improves as the growth rate is kept at the sustainable level of 3%. The firm’s Debt/Asset ratio is expected to decrease from year 2000’s value of 0.30 to 2001’s 0.17 moreover to 2002’s 0.16 without the change in dividend policy.

Since the firm can afford more debt, it is wiser to utilise the opportunity of the tax shield from debt rather than retaining more from their profits. The current dividend policy also benefits the half of the firm’s shareholders who relies on dividend for living cost.

The exchange rate risk can partially...