Valley Company Ltd is a holding company with subsidiaries that have diversified interests. Valley Company Ltds board of directors is interested in the group acquiring a subsidiary in the Machine tools manufacturing sector. Two companies have been identified as potential acquisitions: A Ltd and B Ltd$.$ Summaries of these companies accounts are shown below:

Statement of profit or loss for the year ended $30$th April $2022$

A Ltd TZS $000$

B Ltd TZS $000$

Turnover

$985,000$

$560,000$

Cost of goods sold:

Opening stock

$150,000$

$145,000$

materials

$255,000$

$136,000$

Labour

$160,000$

$125,000$

Factory overheads

$205,000$

$111,000$

Depreciation

$35,000$

$20,000$

Closing stock

$(155,000)$

$(140,000)$

$650,000$

$397,000$

Gross profit

$335,000$

$163,000$

Selling and administration expenses

$(124,000)$

$(75,000)$

Interest

$(35,000)$

$(10,000)$

Profit before taxation

$176,000$

$78,000$

Taxation

$(65,000)$

$(25,000)$

Profit after taxation

$111,000$

$53,000$

Statement of financial position as at $30$th April $2022$

A Ltd TZS $000$

B Ltd TZS $000$

Fixed assets $($Net$)$

$765,000$

$410,000$

stock

$155,000$

$140,000$

Debtors

$170,000$

$395,000$

Bank

$50,000$

$45,000$

Total current assets

$375,000$

$580,000$

Total assets

$1,140,000$

$990,000$

Trade creditors

$235,000$

$300,000$

Other

$130,000$

$125,000$

Debentures

$220,000$

$70,000$

Total liabilities

$585,000$

$495,000$

Total assets less total liabilities

$555,000$

$495,000$

Share capital

$450,000$

$440,000$

Profit or loss account

$105,000$

$55,000$

Total Equity

$555,000$

$495,000$

REQUIRED;

Calculate the following ratios for each company:

Return on capital employed

Total assets turnover

Fixed assets turnover

Gross profit as a percentage of turnover

Profit before tax and interest as a percentage of turnover

Current ratio

Acid test ratio

Debtors ratio $($in weeks$)$

Gearing ratio

Shareholders funds as a percentage of tangible assets.

On the basis of ratios you have calculated in $($a$)$ above, prepare a report for the board of Valley Company Ltd assessing the financial performance and position of A Ltd and B Ltd$.$ Your report should be prepared in the context of Valley Company Ltds interest in the two companies.

QUESTION TWO

You are the divisional manager of Elerai Engineering Ltd$.$ Your performance as a divisional manager is evaluated primarily on one measure; after$-$tax divisional segment profits less the cost of capital invested in divisional assets. The $2024$ projections for the existing operations in your division are as follows:

TZS

Sales $20,000,000$

Expenses $(17,500,000)$

Segment profit before tax $2,500,000$

Taxes $(30\%)(750,000)$

Segment profit after$-$tax $1,750,000$

The value of invested capital of the division is TZS $12,500,000,$ the required return on capital is $12\%.$ You are now evaluating an investment in a new product line that would, according to projections, increase $2024$ pre$-$tax segment profits by TZS $200,000.$ The cost of the investment has not yet been determined.

REQURED:

Disregarding the new investment, what is the projected economic value added $($EVA$)$ for your division in $2024?$

Based on your answer in part $($a$),$ what is the maximum amount that you would be willing to invest in the new product line?

Assuming that the new product line would require an investment of TZS $1,000,000$ what would the revised projected EVA for your division be in $2024$ if the investment were made.

Identify and discuss THREE weakness of using return on investment $($ROI$)$ and Residual income $($RI$)$ as performance measures.

Briefly discuss how the balanced scorecard approach improves the selection of performance measures in organizations.