Anna is considering two stocks as described below.

Red Limited

- share price AUD45.00

- projected earnings per share AUD4.50

- projected dividend per share AUD1.0

- average price earnings ratio for similar companies 10.5 to 1

Blue Limited

- share price AUD18.00

- projected earnings per share AUD2.50

- projected dividend per share nil

- average price earnings ratio for similar companies 8.5 to 1

Anna has requested your advice on whether or not to invest in Red and/or Blue. She is prepared to invest up to a total of AUD10,000 sourced from her cash reserves.

The investment could be in Red (only) or in Blue (only) or in Red and Blue (in any proportion provided the total equals AUD10,000). Or, of course, no investment in either of these two companies is possible.

Appraise Red and Blue and make a recommendation. In your response make sure you clearly set out your reasons. (5 marks)