Question 1 (15 marks) a) Company EEF ltd is considering an investment of 100,000. The desired payback period is 3 years. The board of directors have identified two alternatives; project A and project B. The expected annual cash flows are as follows: Cash flow: Project A Project B Y0 (-) 100,000.00 (-) 100,000.00 Y1 35,000.00 35,000.00 Y2 28,000.00 35,000.00 Y3 32,000.00 35,000.00 Y4 40,000.00 35,000.00 Required: Calculate the Payback period of each project and advise EEFs board of directors which project they should invest in. (7 marks) 2 b) Mrs Daisy is considering two securities, A and B, and the relevant information is given below: State of Economy Probability Return on Security A (%) Return on Security B (%) Bear 0.6 3.00% 6.50% Bull 0.4 15.00% 6.50% 1. Calculate the expected returns and standard deviations of security A and security B. (5 marks) 2. Explain how diversification can reduce the unsystematic risk of a given portfolio? (3 marks) Question 2 (15 marks) a) Agency theory is a management and economic theory that attempts to explain relationships and self-interest in business organisations. It describes the relationship between principals/agents and delegation of control. It explains how best to organise relationships in which one party (principal) determines the work and which another party (agent) performs or makes decisions on behalf of the principal (Jensen and Meckling, 1976; Schroeder et al., 2011). Discuss. (10 marks) b) Explain how far managerial incentive schemes based on share options and profit targets ensure that managers pursue the goal of maximising shareholder wealth. (5 marks)