Democracy Essay Example | Topics and Well Written Essays - 250 words

Democracy - Essay Example With that being said, what makes democracy American to start with? First, democracy is â€Å"a political system or form of government† of the people living in a specified territorial ground which it also protects. Undoubtedly, â€Å"it runs with promulgated rules and laws† that are embedded in a constitution which people have to abide with. Second, sovereignty rests on the people therefore they are given the â€Å"right of suffrage or the right to vote†. (â€Å"What is democracy?†, 2004) This also means that major decisions and issues must be thrown to the electorate to decide. Within this context, the â€Å"majority rule† is followed. Thirdly, democracy is always directed to work for the â€Å"common good of the society† covering the fields of education, food, shelter, environment protection, safety and order. Fourthly, democracy always considers the respect for the dignity of man and his personal freedoms such as freedom of religion, freedo m of expression, among others. Learning from the above, what else does not work with democracy? According to the International IDEA : â€Å"The relationship between democracy and development is the key challenge.

Indian Banking Industry Competitiveness and Market Structure

Indian Banking Industry Competitiveness and Market Structure Introduction After 1991 crisis, Indias liberalisation journey was multi-faceted. One of the major areas of liberalization was the banking sector which was highly regulated and controlled by government. Most importantly for banking industry, as per the M. Narasimhan committee recommendations, the liberalization came in the right areas namely interest rate, reduction of reserve requirements, entry deregulation, credit policies and prudential supervision. Incase of interest rates, they could now be determined by the banks based on their cost of funds rather then government fixing them for banks. The administered regime for interest rate came to an end except for interest rate on savings account. The reduction of reserve requirement for banks made huge capital available for banks which could be deployed in the business. The entry of new players was de-regulated. The government empowered the Reserve Bank of India to issue licenses to the new players, if they met the set criteria jointly set by RBI and Finance Ministry. The credit rationing was completely done away with. Although there is still credit rationing for priority sector, the banks are free to deploy their capital on the sectors which they feel profitable. Excessive supervision regime came to an end. The Reserve Bank of India made several changes in prudential supervision and gave autonomy to banks in their day-to-day operation. The total asset size of Indian Banking industry is over US$ 270 billion. The total deposit amount is US$ 200 billion. Its branch network is one of the largest in the world with more than 66,000 branches and over 17,000 ATM spread across the country. The bank assets are expected to grow at 13.4% CAGR and it is predicted that India could become the 3rd largest banking hub in the world by 2040. Currently India has 80 Scheduled commercial banks out of which 28 are public sector banks, 24 private banks and 28 foreign banks (Annual Report, RBI). As Indian economy is growing at an average rate of over 7% since a decade, more and more foreign banks are thinking to foray into the Indian market. As per McKinseys report on Indian Banking (2010), total loans-to-percentage of GDP, could grow from its current level of around 30% to ~45% in years to come. Such huge opportunities also  prompts several questions: Who is/ are the dominant players in the market? What is/are their share in the banking industry? What is the market structure of Indian banking industry; is it a monopoly or a perfect competition? Objectives and Motivation: The objective of this dissertation is to understand the Indian banking industry, its composition (nationalised banks, private bank and foreign banks) and knowing the players of the industry. Further the study will find out how much concentrated the Indian banking industry is and provide knowledge regarding top 3 as well as top 5 major banks. Such a concentration ratio would give a fair idea of how decision of the top players as an implication on the other industry players. The study will include the determination of the market structure of Indian banking industry. Its imperative to know whether the industry is a perfect competition, a monopoly or a monopolistic competition. This would lead to understanding of the cohesive behaviour of the market players. My motivation for choosing this topic came from the complexity of the Indian banking industry. The number of players, entry of new players, consolidation among the existing players, ever-changing economic scenario of India etc and its impact on the banking industry always fascinated me to do a study on the Indian Banking industry. I also feel that such study would be useful not only for the policymakers within the central bank and the government but also for the existing players, the potential entrants and for other stakeholders of the banking industry. Literature Review As per the neoclassical theory, the spectrum of market structure can be defined by the number of firms and size of those firms in the market [Goddard, Molyneux Wilson (2001)]. Various numerical measures of concentration have been used by empirical researchers in order to find the concentration of industry players. But at the same time, there is no single perfect measure for concentration [Goddard, Molyneux Wilson (2001)]. Nevertheless all these measure are subject to the idiosyncracies and limitation; they usually tend to correlate highly with each other [Curry and George (1983); Scherer and Ross (1990)]. Hall and Tideman (1967) have provided the desirable properties which are required for these measures of concentration to be acceptable. Concentration measures like k-bank concentration ratio, Herfindahl-Hirschman index (HHI) are extensively used to measure the banking sector performance as a function of market structure [Barth et al., 2004, Beck at el, 2006)]. k-bank concentration ratio For measuring the concentration of firms, the most frequently used ratio is k-bank concentration ratio (Bikker 2004). The reason this ratio is so frequently used is because of its simplicity and limited data requirement. The index gives equal emphasis to the k leading banks, but neglects the many small banks in the market. It is a one dimensional measure ranging between zero and unity [Al-Muharrami S.,Matthews k., Khabari Y (2006)]. In a review of 73 US Structure-Conduct-Performance studies in banking from 1961 to 1991, in 37 studies the k-bank deposit concentration measure was used (Molyneux et al. 1996) Herfindahl Hirschman Index (HHI) HHI is another benchmark measure for measuring the bank concentration and gives more weight to larger banks. It was developed by A.O.Hirschman. It expands to all the banks in the system, thereby avoiding the arbitrary cut offs [Alegria, C and Schaeck K (2006)]. Bikker (2004) highlights the importance of HHI in the theoretical research. In practice, the HHI plays a pivotal role in the US for the approval of bank mergers where the post mergers market HHI cannot exceed 0.18 and that the change in the index should be less than 0.02 (Cetorelli, 1999). This index is also used to measure the bank concentration in Arab GCC banking system [Al-Muharrami S.,Matthews k., Khabari Y (2006)] and in measuring the competition and market structure in the Saudi Arabia [Al-Muharrami (2009)] Panzer and Rosse H statistics The measure of market structure helps in determining whether the market enjoys perfect competition, monopoly or monopolistic competition. This is also known measuring the monopoly power hypothesis. It means that in more concentrated markets the bigger players tend to be collusive and try to dominate the market. Also their actions have considerable impact on the other market players. There are several models for determining the market structure. The models are divided into two parts: 1) Structural Models and 2) Non Structural Models. This study will employ the non-structural model approach suggested by Rosse and Panzer (1977) and Panzer and Rosse (1982, 1987), popularly known as the H-statistics. It is widely used in determining the competitive structure of the banking industry in various countries. In the banking industry, there is extensive use of Rosse and Panzer method and has got a wide practical applicability. In his study on New York banks, Shaffer (1982) had observed that banks had monopolistic competition. Similar study for Canadian banks by Nathan and Neave (1989) found a perfect competition for 1982 but monopolistic competition for 1983-84. Japan revealed perfect competition [Molyneux et al (1996)]. Molyneux et al. (1994) also tested the P-R statistics for French, German, Italian, Spanish and British banks for the period of 1986-1989 in order to determine the competitive conditions of major European countries. Methodology The study involves the use of k-bank concentration ratio and HHI ratio for gauging the competition and Panzer and Rosse for determining the monopoly power of the players of Indian Banking industry. These ratios have been extensively used in the different studies mentioned above. K-bank concentration ratio measures the market share of the top k-firms in the industry. The equation is n CRn = à ¢Ã‹â€ Ã¢â‚¬ËœSi i=1 Where Si is the market share of the i-th firm when firms are ranked in descending order of the market share. Market share is measured in terms of sales, assets or number of employees. Commonly used values of n include 3, 4, 5 or 8. The researchers have also found that there is high correlation between concentration ratios defined using alternative values of n [Bailey and Boyle (1971)]. The advantage of k-bank concentration ratio is that it is easily measurable; one needs to know only the total size of the industry and the individual sizes of firms. But it lacks in taking the size distribution of remaining firms. In this study, the market share would be measured on the basis of the loan size (assets) and the deposit size (liability) of the banks. The value of n would be 3 and 5 i.e. CR3 and CR5. HHI uses information about all points in the firm size distribution. It is defined as the sum of the squares of the markets share of all firms: N HHI = à ¢Ã‹â€ Ã¢â‚¬ËœSi2 i=1 Where Si is the market shares of the firm i and N is the total number of firms in the industry. In the calculation of HHI, the larger firms get a heavier weightage than their smaller counterparts which reflects their relative importance in the market. This study uses P-R h-statistics, a non-structural model, measuring competition and emphasizes the analysis of the competitive conduct of banks without explicit information about the structure of the market. The P-R determines the competitive behaviour of banks on the basis of the comparative static properties of reduced-form revenue equation based on cross-section data [Panzer and Rosse (1987)]. The equation is Ln(TREV) = ÃŽÂ ±0 + ÃŽÂ ±1 ln PL + ÃŽÂ ±2 ln PK + ÃŽÂ ±3 ln PF + ÃŽÂ ±4 ln RISKASS + ÃŽÂ ±5 ln ASSET + ÃŽÂ ±6 ln BR The variables are defined as follows: TREV : the ratio of total revenue to total assets PL : ratio of personnel expense to employees PK : ratio of capital expense to fixed assets PF : ratio of annual interest expense to total loanable funds RISKASS : ratio of provisions to total assets ASSET : bank total assets BR : ratio of number of branches to total number of branches in the country. The H-statistic value is the sum of factor price elasticity: PL, PK and PF. The value H à ¢Ã¢â‚¬ °Ã‚ ¤ 0 implies monopoly equilibrium. A value of 0 Data The data for all the calculations of k-bank concentration ratio, HHI and P-R H-statistics will be obtained from Orbis database. Further, the data would also be taken from the Reserve Bank of India(RBI)s profile of banks 2004-2005 2008-2009. Incase any data is not available from the two main sources (Orbis and RBI), the data would be extracted from financial statements of banks, from their websites and from reports published on the Indian Stock exchanges namely Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The sample period covers 2002-2008. Conclusion The conclusion would include the interpretation of the results obtained by usage of E-view and MS- Excel software. In summation, the study would help in knowing the concentration ratio through k-bank ratio as well as HHI and help in understanding the monopoly power of large banks in India. Such a study would be helpful to determine the cohesive behaviour of the players of industry and how their decision would affect the entire industry as well as the Indian economy. With a lots consolidation happening in the industry, such a study would help in understanding the shifts in the concentration and market powers if any. Last but not the least; an attempt would be made to give some recommendations based on the results.

Analyzing Macbeth According To The 7 Habits Of Highly Effective Teens :: Stephen Covey, Seven Habits

In reading William Shakespeare's play, MacBeth, readers can plainly see that character development is crucial to developing the plot, as well as the overall appeal of the literature. One can see the growth in Macbeth and Lady Macbeth throughout the story. The changes in the characters' personas is very much visible to the reader throughout the storyline. In analyzing MacBeth, one can use Sean Covey's insightful book, The 7 Habits of Highly Effective Teens, to show the seven characteristics, as Covey describes them, show the changes in Macbeth and Lady Macbeth.To teach one's self a lesson in changes of character, one should read up on the character Macbeth. This man made a turn from a, more or less, flat character in the beginning of the story to a much rounder character with many complex parts of a personality by the time the story was over. But the common denominator within his character in all parts of the story was that, despite his stature as a "good guy" or a "bad guy", Macbeth exhibited absolutely no good qualities as shown in Seven Habits. When the witches foretold of his destiny, Macbeth did not Begin with the End in Mind. Hewas not proactive in helping his destiny come to pass, having his wife actually scheme to assassinate King Duncan. He did not follow the habit: "Seek First to Understand, Then to be Understood". He never tried to understand anything. He just followed what his wife told him to do. When he thought that there was a threat to his position he would do anything, included cold-blooded murder, to alleviate the strain in his deranged mind. Even those close to him such as Banquo and others were killed just because of MacBeth's reactive nature. This is definitely a sign of a man with a win-lose paradigm. It was his way or the highway. MacBeth also had bad habits, such as being a procrastinator, waiting for Lady MacBeth to come up with a plan before he thought about the consequences. On the other hand, Lady MacBeth exhibited some positive habits during the story. When she found out of MacBeth's destiny to become Thane of Glamis, Thane of Codor, and ultimately, king, she took initiative in planning out the king's untimely murder. She cunningly planned and plotted, all for the straight-forward reason of her husband being able to assume the throne as king.

Expository Essay on the Life Essay

Jean Little was born in Taiwan in 1932 but grew up in Ontario, Canada. She was born with a serious eye disease and her vision is severely impaired. Though she has overcome this handicap and become a successful children’s author, it is clear that as a child, she must have suffered ridicule and mockery from other children in school and other places. She was different. Many times, children with disabilities are more sensitive than normal kids. They quickly learn that they’re different. They learn firsthand how cruel their peers can be if they look or act differently. They spend uneasy nights crying themselves to sleep. The things that happen to us during those young years we spend in grade school often affect how we live our lives and what type of people we become. Everyone can recall a memory from their childhood, a moment when they were chosen for a sport or not chosen. A moment when they were honored for some accomplishment or laughed at for some misspoken word. Committing some sin such as passing gas while giving a book report in front of the class can scar a child for life. These are the types of incidents that can turn an 8-year old boy into an extreme introvert. Or the class clown, depending upon how the child chooses to deal with the mishap. I believe that this author plays out her painful childhood on the pages of these children’s novels, but unlike her real life, always with a happy ending. In her stories, the children and the adults are kind and understanding. They’re compassionate folks who care and want to help. This is of course a stark contrast to what life is really like in the twenty-first century. Jean Little also develops stories that contain strong bonds between animals and humans, leading one to think that she may have turned away from friendships with other kids her age and instead chosen relationships with animals. Animals are non-judgmental. One thing about your dog: he’ll always love you no matter what you look like. Your cat doesn’t care if you’ve got a funny looking nose or acne. Many lonely people find lifelong friendships with a parrot. Our pets give us unconditional love, something you rarely see from humans even under the best circumstances. Jean Little’s parents were both doctors and probably made every effort to make sure that their daughter grew up as normally as possible. Having doctors as parents certainly afforded her all the best medical attention. But there’s no medicine for an injured self-image. In her books, Jean also explores strong family relationships. The homes and families in her books are happy and well-rounded, which leads one to think that her parents might have over-protected her. Perhaps they knew of the cruelty of grade-school children and wanted to build a wall around their daughter to keep her from harm. That would be a normal reaction for parents of a handicapped child. A handicapped child still sees the mockery from other students. They still hear the snickering and laughter. They hide these violations in their hearts and silently suffer. Often, the wounds are deep and the scars don’t heal. In our society, especially in recent years, children who have suffered such abuse from their peers have gone on to formulate well-thought-out plans for revenge, as in the Littleton, Colorado school shootings. They’ve bought guns and special clothing in their crusade against the cruelty of fellow classmates. {http://www. cnn. com/SPECIALS/2000/columbine. cd/frameset. exclude. html} So many times, these situations have gone unnoticed until it was too late. In recent years, the lives of teachers and students have been needlessly lost because adults have failed to realize how important, how critical it is for children to feel as if they fit in. Jean Little has taken her hurt and humiliation and turned it into uplifting literature for children. Though she too suffered verbal abuse and rejection because she was â€Å"different†, she takes her painful childhood and uses it to build great literature for kids. In her book, â€Å"Somebody Else’s Summer†, two 11 year-old girls find themselves being sent off for a long summer vacation in places where they don’t want to be. Samantha is an athletic girl, being sent to stay with her grandmother’s friend who runs a book store. She dreads going and daydreams of how boring it will be to be stuck all summer with a bunch of dusty old books. Alex is a quiet girl who loves to read. She’s is being sent to a horse farm for the summer. She is horrified to think of interacting with livestock, of getting dirty and sweaty. There will be bugs and spiders and she’s scared of what else might be found on a horse farm. These two children meet on an Air Canada flight and quickly become friends. As they talk, one of them comes up with a crazy idea. What if they traded places? I believe the author sees herself as both of these characters: a quiet girl who loves to stay indoors with her pets and her parents. But also, if only in her 11-year old imagination, this author sees herself as an outdoor type, able to hike through the woods, ride horses, and do all the other things that a normal child might do. Activities that Jean Little was never able to enjoy because of her blindness. In â€Å"Somebody Else’s Summer† Jean Little explores the idea of trading places. As a little girl, she may have daydreamed of becoming someone else, someone with healthy, normal eyes. Someone who could do all the things the other kids could do. If you read this book without knowing anything about this author, you think of it as a delightful children’s story†¦maybe something along the lines of â€Å"The Parent Trap†, an amusing tale of two kids having a summer they will never forget. There’s fun and frivolity as the girls set about taking up each other’s identity. Can they pull it off? Or will they be caught and punished? This is a charming story that any ten or twelve year old girl would enjoy reading. But if you read Jean Little’s biography, you quickly realize that she builds the story around her own reality and the life that she always dreamed of having. She is both characters and the story allows her the opportunity to explore the life she could never have. Of course she enjoyed the life she had with her parents growing up. She loved them. She loved her books and her pets. But she has spent her life having to say no to rock climbing, sky diving, canoeing, field trips†¦fun adventures that most of us take for granted. Still she dreams. She dreams of being someone else. Many handicapped children dream of being someone else. Someone healthy. They dream of going on all the adventures so-called â€Å"normal† children can go on. All kids want to be liked. They want to be popular. They need to be included. Handicapped children are no different. They have the same hopes and dreams that any other child has. It’s very important that they feel like part of the group. {http://www. hcaserves. com} When you read â€Å"Somebody Else’s Summer† knowing something about the author herself, you’re thankful that she was able to find a creative outlet for the cruel mockery she must have endured as a blind child. If she had not had the loving support of concerned parents, if she had not had a dog who loved her no matter what, her talent as a children’s author might never have developed and come to the surface. As compassionate human beings, we all love to see someone turn adversity into opportunity. We love seeing the underdog triumph. It gives us a wonderful feeling in our hearts. It reinforces what it is to be human in each of us when we see someone overcome difficulty or hardship to make something of themselves. In Jean Little’s literature and in her life, we see a woman of courage who has achieved success in spite of her physical†¦and emotional, hardships. Jean takes the lemons that life has dealt her and makes a very fine†¦and successful, lemonade stand. In her stories we can look at the world thru the eyes of an 11 year-old. We can see a hopeful future. She reminds us to focus on the positive things in this life. For a few moments, we are taken away from the cruelty of reality and transported to her world: a world where people accept you for who you are, a world where your physical appearance doesn’t matter. In her world, strangers are kind and helpful and the problems of life amount to no more than what we will have for lunch. Or what game we shall play next. Works Cited CNN Website. May 1999 http://www.hcaserves.com

Deutsche Brauerei Essay

Deutsche Brauerei was founded in 1737 and has been in the Schweitzer family for 12 generations. The company produces quality beer and has won awards over the years and is owned entirely by 16 uncles, aunts and cousins. In 1998, Deutsche Brauerei expanded into Ukraine. Despite the Russian debt crisis, the popularity of Deutsche’s beer increased its sales greatly and within three years of launch, Ukrainian consumers accounted for 28% of Deutsche’s sales. Furthermore, most of the unit growth in sales during that time period was also contributed by Ukraine. In an attempt to market the beer even more aggressively, Lukas hired Oleg Pinchuk, a marketing guy who understood the Ukrainian markets and had previous experience of marketing beer for a major Ukrainian beer producer. In the following report, we aim to evaluate the past and prospective financial performance of the company, dividend policy and to critique its liberal credit and inventory policies. An appropriate compensation scheme will also be recommended. Adoption of a Compensation Scheme for Oleg Pinchuk It is our belief that Oleg Pinchuk does deserve an increase in his compensation package to provide incentive for him to stay and provide future results. His strategies for setting up infrastructure in the Ukraine have been fundamental to the company’s sales growth. We are also concerned that some of his current policies may not be profitable and are taking on too much risk as the economy shows signs of a recession. Also, we highly recommend that the design of the compensation package be changed as it currently creates a large agency problem. In 1998, Deutsche Brauerei employed Oleg Pinchuk as the Company’s Sales and Marketing Manager. Previously Pinchuk has worked for a major beer producer in the Ukraine giving him invaluable insight into the industry and environment. The main goals he was placed with was to market Deutsche Brauerei’s beer more aggressively while taking advantage of the large opportunities existing in Central and Eastern Europe. â€Å"Our beer almost sells itself; discount pricing and heavy advertising are unwarranted. The challenge is getting people to try it and getting into a distribution pipeline. † Pinchuk quoted. Initially in 1998, Ukraine had no beer distributors, presenting a large problem – the company had no means of distributing the product amongst ustomers. Distributors in the Ukraine had no capital and could not receive financing from banks to set up their business because they had no collateral, low profits, negative cash flows and were seen as a high risk. They were also not able to bear the credit terms that were currently implemented on the German distributors . This is where Pinchuk’s strategies have been essential for our expansion into the Ukraine. Pinchuk, on a small budget, managed to organise five distributors and set up warehouse arrangements. He relaxed the credit policy for the Ukraine distributors from 2% 10, net 40 to 2% 10, net 80 – essentially financing their business and making it possible for them to set up and operate. Carrying a substantial part of the distributor’s inventory also took pressure and costs away from the distributors while making it possible to respond rapidly to changes in demand. These strategies have increased customers in the Ukraine from 0 to 211, with even more expected in 2001. For Oleg’s strategies to be implemented, the business has required large working capital investments. Particularly in accounts receivable where days in receivables is nearly 90 days. We believe that Pinchuk’s analysis of the return on investment has been overstated because he hasn’t taken into account the investments in inventory and capital expenditure that would also be needed. Exhibit 3 shows our adjusted analysis of the return that the business is receiving after taking into account changes in inventories and capital expenditure. We assumed that 85% of changes in inventory and 90% in capital expenditure were attributed to investment in the Ukraine. These assumptions are explained in the exhibit. Our results still produce a high return of 42% in the year 2000 which is much higher than the cost of financing long-term debt at 6. 5%. Notably, these investments are risky and the company needs to compare the return to their risk adjusted cost of capital for the Ukraine and not the cost of financing the debt to see if it is worthwhile. Exhibit 4 gives a good analysis of how these policies have affected the business’ performance and situation. Although sales growth has been consistently large, operating profit margin has decreased overall since his strategies were implemented. Return on equity and net assets have increased and in the year 2000 were 10. 3% and 8. 4% respectively. This is a good result for the business and shows efficient management of assets. It seems that Pinchuk’s strategies were possibly harmful to the business by decreasing the profit margin and taking on a lot of risk. It is our belief that the credit policy should not be relaxed and could even be tightened to less than 80 days. Unfortunately, reducing risk by tightening the policy would be accompanied by a decrease in sales. Although Pinchuk’s strategies have been potentially damaging, we do believe that he deserves an increase in his salary for expanding the company despite facing difficult conditions. His current compensation package is a base salary of EUR40,000 plus an incentive payment of 0. 5 % of sales growth. The current compensation package provides Pinchuk with an incentive to pursue projects that are risky to the company like extending large credit to distributors who are unable to pay it back. This would increase sales, thus increasing his salary, but would have a negative effect on both profits and the company. His incentive payment needs to be aimed more at collection and profits rather than sales growth. Our recommendation is to increase his base salary to EUR50,000 and have his incentive payment tied to annual profits (0. 6% of the annual increase in profits). However, in our recommended financial plan for 2001, there is a projected net profit of EUR 2,712,000. This is a decrease in profits from the previous year and would imply that Pinchuk would receive no incentive payment for 2001. Hopefully this would motivate him to increase the following year’s profits by revising his marketing and collection strategies. Analysis of Dividend Declaration Traditionally, DB pays out 75% from earnings as dividends each year to shareholders. At the moment, the company has a cash shortage as it is holding high levels of inventory and is extremely relaxed in credit terms for their Ukrainian distributors. Paying out dividends at 75% would mean increasing debt in order for the company to fund their proposed investment in a new plant. This would add strain on the already huge short-term debt that they have taken on. The possibility of a financial downturn in 2001 adds to the uncertainty of an increase in profits as projected in the financial plan. Guaranteeing that the company will pay out EUR698,000 in dividends might be too risky. Rather than rely on more bank borrowings, Deutsche Brauerei should retain more earnings to cover their bank borrowings and to also finance their future investments and projects. In addition, should there be a financial crisis, the retained earnings would help to cushion the impact from the crisis. As most of the shareholders are older members of the Schweitzer family, and are retirees who depend on the dividend payout, reducing the dividend payout might cause some upset. However, paying out a dividend percentage of 75% is causing more harm to the company. By reducing this percentage to 60%, the company is able to retain 40% of their net profits for reinvestment and financing future projects. These retained earnings would also help ease the problem of their current cash shortage. Dividend Payout| 50%| 60%| 75%| | 2001| 2002| 2001| 2002| 2001| 2002| Net Income| 2712| 3439| 2712| 3439| 2712| 3439| Dividends| 1356| 1720| 1627| 2063| 2034| 2579| | | | | | |   | Retention of Earnings| 1356| 1720| 1085| 1376| 678| 860| The table above shows the changes in retained earnings according to the changes in dividend percentages – the higher the dividend payout, the lower the retained earnings. It is recommended that, in the first quarter of 2001, the company should pay out the same amount of dividends which the shareholders received in 2000 (EUR 546, 500). It should be explained that if the forecast for 2001 is correct, and there is no financial crisis, the shareholders can expect a larger dividend payout in the next quarter. From our recommended financial plan (i. e. net profit is EUR 2,712,000), paying out dividends of 60% would mean that the shareholders can expect to receive a payout of EUR 406,800 in the second quarter. Analysis of Deutsche Brauerei’s 2001 Financial Budget One of the main concerns for Deutsche Brauerei’s financial budget for 2001 is its heavy reliance on short-term debt financing. This is mainly due to operating strategies, policies, large sales growth, dividends and capital expenditure being financed through working capital. These have all attributed in draining the company’s cash and causing the business to finance the investment through working capital using short-term borrowing. The overall reliance on debt financing has stayed around 42% (debt/total capital ratio, Exhibit 4). The main borrowing used by Deutsche Brauerei has been short-term debt, so the company has incurred a large cash drain. Short-term debt requires fast repayments to be made and normally charge a higher interest rate than what is charged on long-term debts. Short-term bank borrowings have increased dramatically from 1997 to 2000 and are projected to increase further in 2001 and 2002 (Exhibit 1). As for long-term debt, it has been steadily decreasing since 1997, further showing Deutsche Brauerei’s heavy reliance on short-term debt as their main source of financing. The 80-day credit policy given to Ukraine distributors has resulted in large increases in sales and accounts receivables. Exhibit 4 shows a large growth rate in sales and receivables mainly from the Ukraine. In 1998, accounts receivable in the Ukraine were EUR 424,000 and by 2000 have dramatically increased to EUR 6,168,000. In comparison with Germany, the Ukraine accounts receivable has grown at an extremely large rate. This is mainly due to the fact that most of the new Ukrainian sales are on credit. The credit policy gives distributors 80 days to pay, but in reality, in 1999 and 2000, the days in receivables was 85. and 87. 1 respectively. The fact that it is taking such long periods of time to receive cash from sales is forcing Deutsche Brauerei to finance working capital in other ways such as short-term borrowing. The company also holds a large amount of inventory for the Ukraine distributors. This requires extra investment in inventory and that this inventory is held for longer . This results in it taking even longer to receive cash from our investment, thus increasing the already stretched cash conversion cycle. Exhibit 1C shows that Deutsche Brauerei’s inventories have been steady right up until 1999 and have approximately doubled. The large dividend payout ratio has also resulted in the increased use of short term financing. Although the business has substantial profits to pay out these dividends, the cash is already tied up and these payouts have required more short term financing. The business’ 25% plough back ratio is not sufficient for reinvestment, requiring even more future borrowing to pay for capital expenditure. Capital expenditure of EUR 7 million has been forecasted for both 2001 and 2002, requiring even more short-term borrowing. To prevent large cash drainage in the upcoming years, Deutsche Brauerei needs to re-evaluate their debt financing choices. Long-term debt should be considered as an alternative to short term debt. Not only will this decrease the strain on the company’s cash, it will also allow for the investment in a new plant and equipment for 2001 because of the availability of funds. Long term debt can also be used in 2002 as a source of financing for the proposed new warehouse. Since the cost of the warehouse is considerably high (EUR 6. 8 million), it would be unwise to finance it using short term debt, thus, long term debt would be the appropriate choice. Proposed Amendments to 2001 Financial Budget: To produce more accurate predictions for the coming year, there are some amendments that need to be made to Pinchuk’s forecasts and assumptions. Firstly, in Pinchuk’s financial plan, sales growth in Germany and Ukraine were projected to be 3% and 45% respectively. Germany’s growth is believed to be a fair representation but the predicted sales growth for the Ukraine seems to be overestimated. New projects initially have large growths per year but they also decrease rapidly. In 1999, actual sales growth for the Ukraine was 312% but in 2001, Ukraine’s actual sales growth was 47%. Therefore, for the year 2001, it is believed that sales growth should decrease to a figure considerably less than 45%, for example, 30%. Also, the operating margins seem to be optimistically high at 7%. An average of the operating profit margin from the past 4 years is 6. 88%. This is possibly still too high in comparison to Germany and Ukraine’s operating margins of 6. 10% in 2000. Our recommendation is to use 6. 1% again for 2001 because you would not expect operating profit margin to increase if the predicted global recession occurs. We have also changed the dividend payout policy to a recommended 60% as explained earlier in the dividend declaration section. Increasing the credit policy in the Ukraine to 90 days could be seen as a very risky strategy to pursue especially with the current signs of a global financial crisis. Sales would increase in terms of accounts receivable but the company already stands to lose a lot of money if distributors start to default. A financial crisis would cripple the distributors in the Ukraine and they would be forced to default their accounts. It is suggested that the policy should be left at 80 days to prevent that potential loss. It is also suggested that allowance for doubtful debts should be increased from 2% to 6% to account for the potential recession. As mentioned earlier, it would be wise to tighten the policy rather than let it increase to 90 days in 2001. A sensitivity analysis on allowance and net profit was undertaken in Exhibit 2C, the purpose of this analysis is to determine how net profit would change given our assumption for the allowance of doubtful debt. Pinchuk assumed in his projections that the allowance percentage for the year 2001 is going to be 2%. However, it is believed that this is a considerably low percentage and should be increased to 6% to account for the potential recession as mentioned above. Our sensitivity analysis yielded the following results, in 2001 – if the allowance percentage is set at 2%, then net profit would be EUR 3,083,000. On the contrary, if the allowance is set at 6%, net profit will decrease to EUR 2,712,000. We believe that this decrease will account for the potential recession that may strike in 2001. The company is also advised to take on some long-term borrowing as well as reducing their investment in working capital. This will reduce the reliance on short-term borrowing. It is believed that the firm should get a long-term loan of EUR 14 million because under our assumptions, it would reduce short term borrowings to EUR880,000 which is significantly less than the firms forecasted cash of EUR12 million. This would get rid of the firm’s short-term borrowing reliance and greatly enhance the firms liquidity. Exhibit 2D shows a sensitivity analysis of the effect of changing the quantity of long-term debt and the effect dividend policy has on short-term borrowing required in 2001. Keeping the current dividend policy of 75% and under the assumption the firm borrowed EUR 14 million, short-term borrowing would be EUR 1,292,000. Reducing the payout to our recommended ratio of 60% would reduce short-term borrowing to EUR 881,000. Reducing the ratio to below 30% would eliminate the need for short-term borrowing in 2001. Though due to the large quantities of cash the firm has, eliminating short-term debt completely is redundant. Exhibit 1A shows our forecast of Deutsche Brauerei’s income and balance sheet for 2001. We believe that net income for 2001 will be just over EUR 2,712,000 which is about EUR 1 million less than Pinchuk’s forecast. We have incorporated all our suggestions of policy changes including a long-term loan which will help finance the planned capital expenditure for 2001 as well as fix the current cash problem. Recommendations for Deutsche Brauerei Firstly, in regards to a compensation scheme for Oleg Pinchuk, it is recommended that his base salary of EUR 40,000 to EUR 50,000. Also, instead of having his incentive payment be 0. % of sales growth, it is suggested that the incentive payment be 0. 6% of annual growth in profits. This implies that Pinchuk might need to reconsider his marketing and collection strategies. However, it is believed that this would give him the motivation to increase profits every year and this is beneficial to both him and the company. After our analysis on dividend payouts, it is recommended that the company reduce the dividend payout ratio from 75% to 60%. This would enable the company to retain more earnings for future investments and also to cover their short-term borrowings. This also improves their current cash shortage situation. Lastly, it is recommended that several changes be made to Pinchuk’s proposed financial budget for 2001. Instead of a predicted growth rate of 45% for sales in the Ukraine, it is recommended that a more conservative figure of 30% is used. Also, instead of using an operating margin of 7% for both Germany and Ukraine, an operating margin of 6. 10% should be adopted for 2001. In addition, instead of relaxing credit terms from 80 days to 90 days, the company should keep it at 80 days and aim to reduce that in the future. It is also advised that the company take on a long-term loan of EUR 14 million for the building of the warehouse. Lastly, it is recommended that the allowance for doubtful debts be increased from 2% to 6%. These proposed changes take into account the possible recession that may take place in the coming year. Overall, Deutsche Brauerei has been successful in its expansion into the Ukrainian market despite difficult conditions. With slight changes to their current strategies, the company has the potential to achieve even greater success.