The major problems that need to be addressed are the accuracy of the 2001 budget, the amount of the current quarter dividends, and a way to properly compensate Oleg Pinchuk for the work he has done expanding the company in Ukraine. 1. Review the current and prior financial statements. Try to project what is needed in the following year. 2. Investigate growth and distribution channels. Are payable terms acceptable? 3. Need to increase production to match growth.
4. Need to build new plant and finance EUR 7million.
5. How much of a projected pay increase will Oleg receive? 6. Should dividend continue to be 75% of earnings?
1 - 4.) In reviewing the financial plan for 2001 the actual profitability of the company and financing needs to be taken into consideration. The increased growth is a good thing, but a strong plan needs to be in place to finance the growth. Oleg, who is in charge of the Ukraine expansion seems to go about distribution channels, A/R policies, and credit lending with a much more laid back policies than local. Exhibit 6 in the case breaks down Oleg’s analysis of Deutsche Brauerei’s return on investment. According to Oleg, he calculates the ROI to be 130% in the current year and continue to stay at this impressive figure in the following 2 projected years. Although Oleg’s ROI formula is correct, I see 2 flaws in his calculation. Oleg removed all fixed costs from his formula, which is not correct, especially being that DB is looking at their ROI numbers in this region to decide whether to invest and build a plant in this region. Also, having bad debt estimated at only 2% seems like a very low estimate considering the lack of faith even by local banks in the area. Oleg says, “Where we we great opportunity in these distributors, the banks see no collateral, low profits, negative cash flow, and high risk. I know these distributors better then the banks know them.” This statement is very scary when...
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