Security Selection at Ace Funds

You are employed as a security analyst at Ace Funds in early January, 2018. Ace is a

large balanced fund that invests in broad range of U. S. securities, both equities and

debt. Ace attempts to maintain a mix of 65% equities and 35% debt instruments but

this ratio can go as high as 80% in equities or as low as 50% in equities depending

on the fund's view of market conditions. Their equity portfolio consists of around

50 U. S. companies representing a wide variety of industries. The debt portfolio

consists of a mixture of corporate bonds issued by U.S. companies and U S.

government debt. The debt portfolio typically consists of BBB or higher rated

bonds although the fund may hold some BB or B rated debt. The maturity of the

debt instruments cannot be more than 30 years and Ace holds a variety of

maturities to somewhat reduce interest rate risk.

Ace is interested in adding some more high tech industry names to the portfolio of

both equity and debt instruments. Ace has been following the Jones Company for

some time as a prospective investment. Jones is a large ($7 billion revenue in 2017)

manufacturer of test equipment used by various semi-conductor companies. While

Jones is very highly regarded and has a long successful track record, Ace wonders

whether Jones common stock and the Jones bond issue is a good investment today

based on their current market valuation. They assign you the task of determining a

reasonable valuation for Jones common stock and a reasonable valuation for the

Jones outstanding bond issue. You are then to make a recommendation to Ace

management as to whether they should purchase both the common stock and the

bond issue at their current price, just one of them or purchase neither given the

current market prices for these securities. If your recommendation is positive,

management will separately decide the appropriate dollar amount of such

investments.

Jones common stock is currently quoted at $31.00 per share. There are 585 million

shares outstanding at present and the stock is widely held. You note that Jones

revenue has grown by over 20% in 2017. Jones beta is 1.5. You identify 6 direct

competitors as shown below: