Question: chris wants to purchase an apartment within five years refer...
Chris wants to purchase an apartment within five years (refer Case Study). Undertake a financial assessment of this objective and comment on whether or not it is achievable.
In your response address three issues:
- the financial capacity to undertake the necessary savings plan for five years for the deposit;
- the financial capacity to service the bank loan (interest only); and,
- the financial capacity to service the bank loan (interest and principal)
The interest on the deposit savings account is 2% and the interest on the bank loans is 4% and the repayments on the bank loans are on a monthly basis.
The term of the interest and principal bank loan is 20 years.
b) Chris currently does not have any insurance relating to his residence. Discuss the types of insurance he should take into consideration both now (as a renter) and in the future (as a property owner).
C) 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.