Question 4 (20 marks) Sweet Pea shares have just paid a dividend of 80.50, which are expected to increase by 15% for the next three years. After that, they are expected to increase by 12% for the following two years, and by 10% per annum thereafter. The required rate of return on Sweet Pea shares is 14% per annum and they are currently selling for $15.28. Should you buy these shares? Why? (10 marks) ii. Forest Products issued 10 year $1.000 bonds, three years ago, with 8% coupons paid semi- annually If the yield on these bonds is currently 6%, at what price are they selling? (6 marks) b. If, in three years' time, the bond's yield is 9%, what will be their value at that time? (4 marks) a. Question 5 (20 marks) Consider the following cash flows of two mutually exclusive projects where the required rate of return is 15%: Year Project Red Project White 0 -S1,200 -$2,000 1 600 1.000 2 550 3 450 i. Based on the payback period rule, which project should be chosen and why? (4 marks) 900 800 ii. Suppose there is no corporate tax and the cash flows above are income before the depreciation. The firm uses a straight line depreciation method to zero. Based on the accounting rate of return, which project should be chosen and why? (4 marks) iii. Based on the internal rate of return (IRR), which project should be chosen, and why? (5marks) iv. Based on the net present value (NPV), which project should be chosen and why? (4 marks) Based on the profitability index (PI), which project should be chosen and why? (3 marks) V