As far as I know, all E34's use the same size master and slave cylinders except the 540 6 speed manual. So anyone with a manual should be able to answer your question except me 'cos I have a 6 speed.
I can't be sure, but I think they do take kinda high in general. You could try a proper bleed. All you have to do is open the bleed screw on the slave cylinder, then have someone press down on the clutch peddle, then close the bleed screw, pull the clutch peddle back which will then pull new fluid into the line from the reservoir. Repeat until the fluid coming out of the bleed screw looks like new fluid. Make sure there is always fluid in the reservoir though. So as you go keep topping it up so no air get's into the line. You can fit a little pipe to the bleed screw so the fluid that comes out can be directed into a bottle instead of the floor.
See link below:
http://www.bmwe34.net/E34main/Maintenance/Transmission/Clutch_hydraulic.htm
If it's taking right at the top and a good bleed didn't make any difference, then the clutch might be worn and close to slipping. You might need a new clutch kit (Pressure plate + Disk) and usually they get the flywheel skimmed so it's nice and flat for the new clutch. However if the pressure plate and flywheel is still in good shape you might get away with just having the disk relined. The only way you'll know is if you pull the gearbox and have someone that works with clutches take a look.
however since this is my first bmw i noticed that the clutch has to be released really far out before it starts "taking" all i want to know.... is this normal??
