Lea is considering two stocks as described below:

Red Limited

share price AUD$45\mathrm{.}00$

projected earnings per share AUD$4\mathrm{.}50$

projected dividend per share AUD$1\mathrm{.}0$

average price earnings ratio for similar companies $10\mathrm{.}5$ to $1$

Blue Limited

share price AUD$18\mathrm{.}00$

projected earnings per share AUD$2\mathrm{.}50$

projected dividend per share nil

average price earnings ratio for similar companies $8\mathrm{.}5$ to $1$

Lea has requested advice on weather she should invest in Red and$/$or Blue.

She is prepared to invest up to a total of AUD$10,000$ 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 AUD$10,000).$ 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$)$