Explain what is meant by ‘mean-variance’ analysis and critically discuss its usefulness with investment selection.

There are four (4) questions, worth 25 marks each. Answer ALL questions Formulae or tables are provided at the end of this document.Maximum word count is listed against each question part where applicable. This does not include any calculations.Question 1 – Weighted Average Cost of CapitalA project requires an initial investment of £130,000. It has been estimated that the project will yield cash flows of £50,000 in for the next 2 years and a year 3 cash flow of £70,000.The company considering this is financed is the following way (Tax is 20%):Ordinary shares: 1.5m shares of 50p nominal value. The shares have a current P0 of 195p. A dividend of 6p has just been paid (the dividend 5 years ago was 3p).Bank Loan: £1,950,000 at 5% interest. Bonds: £1,400,000 of 7% irredeemable bonds (par value) which have a market price of £105.26 (the coupon has just been paid). Required:(a)Calculate the WACC.(10 marks)(b)Calculate the NPV of the project and recommend whether or not it should be accepted.(5 marks)(c)Comment on the weaknesses of using WACC as a discount rate and therefore in the evaluation of projects. (Max word count is 100 words) (5 marks)(d)Compare and contrast the different characteristics of equity and debt finance. (Max word count is 100 words) (5 marks)TOTAL 25 MARKS Question 2 – Rights IssuePine Plc has an ordinary share price of 420p and is quoted on the Alternative Investment Market. It intends to raise £30m through a one-for-four rights issue priced at 350p.Required:(a) What will the ex-rights price be?(3 marks)(b) How many old ordinary shares were in circulation prior to the rights issue?(2 marks)(c) What is the value of a right on one old share?(3 marks)Investor A owns 5,000 shares.Required:(d)What will happen to Investor A’s wealth if they:(i)Take up all of their rights(3 marks)(ii)Sell all of their rights(3 marks)(iii)Take up 60% of their rights and sell the other 40%(6 marks)(e)Discuss what is meant by the ‘pecking-order theory’ of capital structure and its validity. (Max word count is 100 words)(5 marks)TOTAL 25 MARKS Question 3 – Dividend PolicyYou have been invited to a management meeting of your company at which they will discuss dividend policy. There seems a lot of disagreement between management, and you have been tasked with gathering information about the following topics regarding dividend policy to present at the meeting.Required:For each of the following terms discuss how they relate to and could influence the dividend policy of a firm:(i)Signalling(ii)Clientele effect(iii)Irrelevance(iv)Residual approach(v)Agency theoryQuestion 4 – Risk & ReturnSoftfruit plc is considering a two-year investment that has the following probability distribution of returns:Year 1Year 2ReturnProbabilityReturnProbability18,0000.2014,0000.35110,0000.5598,0000.65112,0000.25The discount rate used is 7%. The returns are independent of each other and there is an initial cash outlay of £125,000.Required:(a)Calculate the expected NPV and recommend whether or not it should be undertaken.(10 marks)(b)Calculate the variance and standard deviation of NPV.(5 marks)(c)Explain what is meant by ‘mean-variance’ analysis and critically discuss its usefulness with investment selection. (Max word count is 100 words)(5 marks)(d)Describe how to calculate ‘Co-efficient of Variation’, how its values are to be interpreted and situations where it may be useful. (Max word count is 100 words)(5 marks)TOTAL 25 MARKSEnd of Paper. Please See attached document for Formulae or tables. They are provided at the end of this document.