Deutsche Brauerei
...These large increases in new property, plant, and equipment costs can be avoided if the company does a better job estimating the amount of inventory needed. With the combination of increased accounts receivables, inventory and property, plant, and equipment; Oleg has chosen bank loans as a source to offset those losses. As shown in my Sheet 1 I show the impact of the capital expenditures on the free cash flows. This shows that the combination of factors mentioned above have a major significance on the free cash flows. Without increased short term bank borrowings the company would not be able to pay off all the debt it would have accumulated. Besides increased bank borrowings to improve the outlook of the company, Oleg has chosen to pay out high dividends to shareholders of typically 75% of earnings per year. What Oleg should do is lower the dividend payout and this will lead to less bank borrowing. I also find it necessary that the company reinvest more of its earnings into property, plant, and equipment since inventory problems are a problem. Oleg has another problem in his breakeven analysis in which he assumes a high constant rate of growth. Just because sales in Ukraine grew 47% in 2000, Oleg assumes that growth rate will continue in the future, which is not a safe assumption. We would expect a company to have high growth during its early years; however that growth rate will not remain constant over time. Another problem with Oleg’s analysis is that he is claiming a 130% ROI that he is achieving through a 6.5% cost of funds. The problem with his analysis is that he is not accurately identifying the ROI because he is not including investment in capital expenditures. In sheet 2, I calculate the adjusted ROI using investment in capital expenditures and notice a large difference in the new ROI. Oleg must tighten the policies for inventory and credit in the Ukraine. He needs to apply a new inventory system where there is not an excess supply of inventory for distributors. Since the distributors are unable to store their inventories, it ends up hurting Deutsche Brauerei because they are forced to build more facilities. This leads to more costs for Deutsche Brauerei and in the long run they will have to charge higher prices for their product to adjust for the increase in new operating costs. The credit policy also needs to be improved. There is simply too much time involved in collecting accounts receivables. A new policy needs to be introduced where if distributors do not show the ability to pay back their financial obligations they will lose their right to be a distributor. Although the Ukraine distributors are growing, Deutsche Brauerei needs to act in its own financial interests. This includes collecting on accounts receivables and having a better control on inventory. German distributors have a much smaller receivables growth rate than Ukraine as shown in Exhibit 4. Oleg thinks that his 6.5% cost of funds is a good way to finance the large amounts of accounts receivables, but in the future this strategy will not hold true. The amount of accounts receivables will continue to increase and so will the 6.5% rate that he is borrowing from banks at due to changing interest rates. The Ukraine operation’s free cash flows are calculated on sheet 1 of my spreadsheet. We notice a positive free cash flow for the first year 1998 and then once the Ukraine operations begin we notice negative free cash flows except for 2002 and 2003. Other important calculations in determining the profitability of Ukraine’s operations are shown in Sheet 1 where using a discount rate of 14%, I calculated a terminal value of 72,850. Also of importance are the NPV calculations which are positive and indicate that there is profitability in the Ukraine op...