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.