Chris has received a proposal from a stockbroker to invest AUD10,000 in a listed company called Fresh Food Direct Limited (Fresh Food). The stockbroker holds a strong positive view on the future prospects of Fresh Food. Chris would fund the investment using some of the cash in the bank.

Fresh Food has two listed securities:

Corporate bonds 8 years remaining term, 3% coupon (semi annual), face value AUD1000, market price AUD1050 per bond. The yield on similar bonds is 2%.

Ordinary shares Projected earnings per share AUD5.50, market price AUD95.00 per share. The projected Price Earnings ratio for shares in similar companies is 16.0.

Chris is a value driven long term investor. If an investment is made he will hold the position for at least five years. But he is cautious and is aware that the positive view of the stockbroker is just an opinion and that the future is uncertain.

Chris is comfortable in declining the proposal and not making an investment. He is also comfortable in making a small or large investment in bonds and/or shares. It all depends upon value and price.

Chris has asked you to review this proposal and to prepare a recommendation (make sure you state your reasons). In preparing your review ignore the possible acquisition of an apartment.

Client Name Chris Kit and Jo Jim 71 Widower (single), home owner Age 29 40 and 42 Status Single, renter of Studio Married, home owners apartment Dependents Nil Two children (age 6 and 8) Occupation Engineer Accountant and Biochemist Net Income AUD115,000 pa from salary AUD150,000 pa (Kit) and (after super AUD120,000 pa (Jo) from and after salary tax) Expenses AUD85,000 pa including AUD175,000 pa including the (living and paying rent for the Studio home loan financial) apartment Major assets Cash at bank AUD15,000 Cash at bank AUD75,000 Superannuation Superannuation AUD250,000 AUD120,000 Home AUD1.8 million Car AUD25,000 Nil Retired Doctor AUD85,000 pa total from retirement fund and investment portfolio of bonds and shares AUD55,000 pa Cash at bank AUD30,000 Superannuation AUD1.8 million Home AUD1.5 million Investment portfolio AUD250,000 Car AUD50,000 Nil Nil Major liabilities Major financial goals Purchase an apartment within five years (price approx AUDO.7 million) with 20% cash and 80% bank loan Home loan AUD1.2 million (interest only loan) Operate a conservative budget until the children complete high school in about 10 years time Continue self funded retirement and undertake one overseas holiday each year (approx cost AUD30,000 per holiday additional to normal expenses) Client Name Chris Kit and Jo Jim 71 Widower (single), home owner Age 29 40 and 42 Status Single, renter of Studio Married, home owners apartment Dependents Nil Two children (age 6 and 8) Occupation Engineer Accountant and Biochemist Net Income AUD115,000 pa from salary AUD150,000 pa (Kit) and (after super AUD120,000 pa (Jo) from and after salary tax) Expenses AUD85,000 pa including AUD175,000 pa including the (living and paying rent for the Studio home loan financial) apartment Major assets Cash at bank AUD15,000 Cash at bank AUD75,000 Superannuation Superannuation AUD250,000 AUD120,000 Home AUD1.8 million Car AUD25,000 Nil Retired Doctor AUD85,000 pa total from retirement fund and investment portfolio of bonds and shares AUD55,000 pa Cash at bank AUD30,000 Superannuation AUD1.8 million Home AUD1.5 million Investment portfolio AUD250,000 Car AUD50,000 Nil Nil Major liabilities Major financial goals Purchase an apartment within five years (price approx AUDO.7 million) with 20% cash and 80% bank loan Home loan AUD1.2 million (interest only loan) Operate a conservative budget until the children complete high school in about 10 years time Continue self funded retirement and undertake one overseas holiday each year (approx cost AUD30,000 per holiday additional to normal expenses)