Question
A Ltd. is currently considering undertaking the acquisition of one of, or, possibly both of two alternative companies (B Ltd and C Ltd) to further
A Ltd. is currently considering undertaking the acquisition of one of, or, possibly both of two alternative companies (B Ltd and C Ltd) to further broaden its service offerings. You, the company's financial controller, are given the following information.
A Ltd. | |
Sales | $2,500,000 |
Variable costs | 60% of sales |
Fixed costs | $650,000 |
Invested capital | $1,750,000 |
If A Ltd. acquires B Ltd., it would expect to increase its profit by 20% and would require an additional capital investment of $250,000. If A Ltd. acquires C Ltd., it would expect to increase its profit by 25% and would require an additional capital investment of $650,000. A Ltd has a minimum required rate of return of 11%.
You are required to provide advice on the investment choices based on the following assumptions (word limit: max 40 lines).
1. Assuming that A Ltd has a strong focus on using Return on Investment (ROI) to measure management's performance and there are sufficient resources to invest in both alternatives, you are required to calculate ROIs of A Ltd. both before and after the acquisition of the respective investment alternatives. You are required to advise if A should acquire B or C or both.
2. Assuming that A Ltd has a strong focus on using Residual Income (RI) to measure management's performance and there are sufficient resources to invest in both alternatives, you are required to calculate RIs of A Ltd. both before and after the acquisition of the respective investment alternatives. You are required to advise if A should acquire B or C or both.
3. Compare your recommendations based on ROI and RI above and explain if ROI or RI should be used in business acquisition decisions from a value maximization perspective
please help me with the answer.
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