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1. As a professional investment manager, you have been offered a choice between two mutually exclusive projects. The initial investment is the same: 100. Project A will pay 500 annually for 5 years, beginning 12 months from now. Project B will pay 250 per annum indefinitely. There is also Project C, which is a stock, but you will only be able to hold that stock in your portfolio for 13 week, during which time the stock will go up in price from 70 to 72 and it will also pay a dividend of 1.50.

Required: If the next best investment alternative offers a return 2% higher than Project C, should you choose investment A or investment B? Show your workings clearly [9 marks].

(b) Explain the concept of Security Market Line (SML). Illustrate your answer using graphics [4 marks]

[Maximum word count: 375 words]

(c) As an investment manager, you are considering a choice between adding either a new stock or a new bond to your investor portfolio:

• The stock currently sells at 70; it has just paid a dividend of 8, and the dividend is expected to stay fixed indefinitely.
• The bond is a pure-discount (zero-coupon) bond, with three years to maturity; it currently sells for 140, and its face value is 200.

Required: If your required rate of return is 11%, show you buy the stock or the bond? Show your workings clearly [6 marks].

(d) Describe key differences between equity and debt. [6 marks]

[Maximum word count: 375 words]

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