Financial Projection for Deutsche Brauerei for 2001 and 2002
...t rate may increase during years the economy grew fast. Moreover, I would suggest we borrow some (say 5 million with a maturity of 3 years) long-term debt to replace our short-term liabilities. Since annualised long-term interest rate is normally lower than that of short-term capital, especially when we expect the interest rate tends to be higher. This would increase our liquidity greatly and reduce the solvency risk. I had changed the dividend policy by retaining 40% of earning to the future development. Shareholders may satisfy with high payout ratio; however, under the new dividend policy, the debt to total assets ratios would maintain a level around 40% in 2001 and 2002 (as showed in appendix 2). The growth of net income had offset the influence of tightening dividend policy. The expected dividends would be 2,031 and 2,369 respectively. Moreover, Deutsche Brauerei was owned entirely by Schweitzer family, its shares are not traded publicly. Adjustment to dividend policy would not change the confidence of shareholders. Additionally, we should improve the inventory management. The inventory to sales ratio had increased to 14%, which is about 4% higher than that of 1998. Oleg Pinchuk proposed that we should invest 6.8 million in a warehouse and distribution centre in Ukraine, which we may expect a more efficient inventory management. Since we are closer to our customers, it will shorten the delivery time. We are able to maintain smooth sales with a relative low inventory level. For example, the customers could order small quantity of beers by increasing the number of orders per period. This would improve the cash conversion cycle of customers. Thus, I had set the inventory to sales ratio at a level of 12%, which could improve the efficiency of capital and result in a higher return on equity. With the adjustment made to the forecast of Oleg Pinchuk and approvement of the new projects, the company would expect a ROE of 11.7% this year and 12.9% in the coming year. The debt to total assets would be at a level of around 40%, and the EBIT to interest expense would be improved from 4.7 last year to 5.4 in 2002. Oleg Pinchuk suggested that we should relaxed the credit policy from 2 percent 10, net 80, to 2 percent 10, 90. However, when I calculate cash conversion cycle, the result suggests that we should object the proposal. As appeared in appendix 3 showed that, as the credit policy relax to 90 days, the cash conversion cycle will increase from 74 days to 78 days this year. It will increase the debt to total asset ratio at the same time, which I think should be kept at a level around 40%. As discussed previously, the new warehouse and distribution centre in Ukraine would reduce the cash conversion cycle of customers. Thus, 2 percent 10, net 80 would be the appropriate credit policy in that circumstance. As you asked me to review the base salary and incentive payment of Oleg Pinchuk, I agree to increase his base salary...