Question
Gutho Ltd. is currently considering undertaking the acquisition of one of or possibly both of two alternative companies (Browny Ltd. and Jenning Ltd.) to further
Gutho Ltd. is currently considering undertaking the acquisition of one of or possibly both of two alternative companies (Browny Ltd. and Jenning Ltd.) to further broaden its insurance offerings. Both of these companies have recently indicated that they wish to cease operations. Details of each company's current performance is provided below. Gutho Ltd. Browny Ltd. Jenning Ltd. Sales $1,800,000 $680,000 $750,000 Variable costs 70% of sales 75% of sales 70% of sales Fixed costs $420,000 $140,000 $150,000 Invested capital $1,200,000 $250,000 $650,000 If Gutho Ltd. acquires Browny Ltd. it would expect to increase its current profit level by 5% and would require an additional capital investment of $220,000. If Gutho Ltd. acquires Jenning Ltd. it would expect to increase its current profit level by 20% and would require an additional capital investment of $180,000. Gutho Ltd. has a minimum required rate of return of 8%. Should Gutho Ltd. undertake the acquisition of Browny Ltd and / or Jenning Ltd? Explain your answer and provide supporting Return on investment and Residual income calculations
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