For a number of years L Ltd has used residual income (RI) as the basis for assessing divisional performance, as the directors took the view that RI was a more reliable indicator of performance than return on capital employed (ROCE). At the next directors meeting, a proposal to adopt Economic Value Added (EVA) will be discussed. The following information has been provided for the year ended 30th June 2012: Kshs Million Operating Profit Before Taxes (EBIT) 800 Interest (100) Taxable Income 700 Income Tax (210) Net Income 490 Notes: 1. The Market value of debt and equity was Kshs 1billion and 3 billion respectively. This represents the capital employed. 2. The applicable tax rate was 30% 3. The cost of equity was 15% whereas the after tax cost of debt was 7%. Required: a) Explain the relative merits of RI and ROCE for assessing divisional performance (6 marks) b) Discuss the factors that the directors should consider before deciding whether or not to adopt EVA. (6 marks) c) For the year to 30th June 2012, calculate the EVA and briefly comment on the results of your calculations. (8 marks)