Deutsche Brauerei

Deutsche Brauerei is a family-owned corporation, that has been in operations for 12 generations already. It prides itself with having a high level of focus and control in the way the manage things. Each generation has kept the organization's processes relatively simple, centered on brewing practices and quality. Deutsche Brauerei's rapid growth in the recent years is attributed to three main factors.

First of all, the company's success is centered on the quality of the product itself. It has won numerous quality awards and is one of the most popular beer in Germany. Secondly, the investment in new equipment to replace the equipment destroyed by a fire in 1994, increased brewing capacity and efficiency. Lastly, the decision to enter the Ukranian market in 1998 contributed significantly to the rapid growth. Because of market reforms resulting from the fall of USSR, the company took advantage of the opportunity to capture the large population in Ukraine and capitalize on its strategic location within Central and Eastern Europe.

Deutsche Brauerei is currently enjoying a high growth rate in sales, for 2001 the projected growth rate is approximately 48%. It is unusual that a firm that is so successful at generating sales is taking on such a large amount of short-term debt. One of the principle reasons Deutsche Brauerei has such a large amount of short term borrowings is the pressure they are put under to provide such a substantial dividend payment to shareholders.

The largest financial demand's the firm is currently facing is that they require EUR 7 million for investment in new plant and equipment in 2001 and according to the projections of Pinchuk, are planning to maintain a very high dividend payout ratio for the coming two years of 75%. The biggest driver to the short-term borrowing is the large dividend this company pays. They are paying a 75% dividend at present, and Pinchuk has proposed this continue on in the projected future. Although the facts of the case state that some of the older shareholder's rely on their dividend payment as their sole source of income, it should be clearly explained to them that investing additional funds into company expansion will most likely benefit them significantly in the long term. Sensitivity analysis of the amount of dividends being paid to shareholders indicates that as the dividend payment increases, so does Deutsche Brauerei's bank borrowings. Consequently the firm's working capital decreases in both the projected years of 2001 and 2002 if the dividend payment of Deutsche Brauerei continues to grow as a percentage of earnings. The large dividend payout also has adverse effects on net profit after tax and retained earnings, as indicated by the provided sensitivity analysis.