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The company is seeking to maximize shareholders wealth. Assuming that, Division A acquires a more efficient asset at GH/15 million and Division B sold one
The company is seeking to maximize shareholders wealth. Assuming that, Division A acquires a more efficient asset at GH/15 million and Division B sold one of its assets with written down value of GH\&24 million, and profits are expected to increase and decrease by GH/11 million and GH\&5 million for division A and B respectively. Nadia Limited has a policy of paying 10% bonus on residual income. Required: a) Calculate both the current Return on Investment (ROI) and Residual Income (RI) for each of the divisions. (4marks) Nadia Limited is an organization with two divisions: A and B, each with its own cost and revenue streams. Each of the two divisions is classified as an investment center. The company's cost of capital is 12%. Historically, investment decisions have been made by calculating the return on investment (ROI). A new manager who has recently been appointed in division A has argued that using residual income (RI) to make investment decisions would result in 'better goal congruence' throughout the company. The data below shows the current position of the division as at the end of 31 December, 2021: b) Calculate and comment on the effect of the decision to invest in the new asset and disposal of some assets will have on the current ROI and RI. (13 marks) c) What will be the percentage change in the bonus of each division if the new proposals are considered for each division? (4marks) d) Explain two (2) challenges associated with using ROI and RI to measure performance of divisions. (4marks) (Total=25marks)
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