Case Delta Beverage Group

1370 Words Oct 9th, 2011 6 Pages
Case Delta Beverage Group, Inc.

History

The Delta Beverage Group is a bottling and canning company from the United States. Delta had some very strong brand names, like Pepsi and Mountain Dew, included in their franchises. Around 1988, a price war occurred and Delta suffered from compressed margins. About a year later situation became critical and a new management team from was hired. The new management stopped the fall in prices, the decline in market share and increased margins by changing the cost structure. Delta also acquired some other bottling companies at the same time increasing their sales and operating cash flow. After a couple of years operating profits increased by almost 100% and net income made a solid upward progress.
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Furthermore it is possible to buy and sell European option contracts, an option gave the holder the right to buy or sell the underlying futures contract at a predetermined price.

He could take a put option to exercise a futures contract (against the price of aluminum at that moment), he would only do this if the prices won’t be as high as expected. If the prices behave like the expectations or even better, Bierbaum won’t have to exercise the put option.

The best opportunity is that the total of 8270 tonnes of aluminum could be hedged in future contracts, which will cover the expected case volume of 23.55 million in aluminum cans. This investment should not harm the covenants in 1994 and the following years.

Hedging

With respect to the covenants, Bierbaum wants to look at a financial hedge. In order to quantify the magnitude of the hedge we have to calculate the aluminum cans expenses of Delta. We will make some assumptions on growth rates for the next years. Sales will grow with 4% in 1994, and we assume a growth of 3% in 1995. The same rates we use for the growth of net revenues and growth of cost of sales.

We want to know the amount aluminum cans account for in the cost of sales. According to the provided information cans account for 60% of net revenues. Net revenue in 1994 will be $231,207 * 1.04 = $240,455. The cans contribute 0,60 * $240,455 = $144,273. With a gross margin on cans of 27% the cost of sales of aluminum cans for 1994 is

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