Western Chemical

Topics: Revenue, Income statement, Debt Pages: 2 (629 words) Published: March 27, 2012
Western Chemical Corporation’s Case.
* Q1. The main problem is that the ownership structure is not considered. While the Prague’s plant is set up by a joint venture with a local partner, the other two plants are wholly-owned by WCC. In ignoring the ownership structure, two important issues are not taken into account: the IS of the joint venture is charged by fees (i.e. percentage on revenues: 8%) and interests on the external debt (1.120 on 30). On the other side, in wholly-owned plants’ IS these two components are missing, due both to different ownership and leverage structures. * Q2. In order to avoid the problems WCC management has been dealing with, one possible solution would be to separate the people who are preparing the managerial reports from those who are concerned with external reporting. We believe that a better solution would be to employ an external audit company that could manage to evaluate the performance the right way, according to the common industry’s practice. The goals of internal and external reports are different: the first one is to provide managers informations from inside about each project, so that they could develop diversification strategies; the second one is to provide investors another kind of information, connected to a global view of the firm in terms of performance. * Q3. The importance of cash flow as a measure of value cannot be argued, nonetheless it is inadequate as a measure of performance. EVA is for sure more appropriate, but in this case it has been wrongly employed, due to the superficial approach in not considering the relevant adjustment that IFRS require. 165 Adjustments are provided and each firm should modify the income statement using at least 5 to 15 of the above suggestions. The most important deficiencies in adjustments lies in deferred taxes (i.e. the difference between expensed taxes and the actually paid taxes) and R&D expenses. Moreover, even though “EVA is the most effective...
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