Tom: - Is an experienced management consultant and is employed by one of the largest consulting firms in Asia Pacific. Tom recently returned to Australia following a three year role in Singapore. - Tom works long hours and most weekends. Tom is a keen surfer and this interest was a significant factor in his decision to return to Sydney. - Tom lives in a studio apartment (provided by his employer rent free for two years) but would like to purchase an apartment located near the beach before the rent free period expires. - Tom has a good understanding of financial markets and is familiar with risk and return. - Both personally and financially, Tom is considered to be a risk taker.

a. Tom currently does not have any insurance relating to his residence. Discuss the types of insurance he should take into consideration both now (as a tenant) and in the future (as a property owner).

b.

Tom has received a proposal from a stockbroker to invest AUD30,000 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. Tom would fund the investment using some of the cash in the bank.

Fresh Food has two listed securities:

Corporate bonds 6 years remaining term, 3% coupon (semi annual), face value AUD1000, market price AUD1100 per bond. The yield on similar bonds is 1%.

Ordinary shares Projected earnings per share AUD4.00, market price AUD75.00 per share. The projected Price Earnings ratio for shares in similar companies is 15.0.

Tom 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.

Tom 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.

Tom 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 Tom Kit and Jo Jim 35 45 and 42 71 Age Status Married, home owners Widower (single), home owner Single, renter of Studio apartment Nil Strategy Consultant AUD195,000 pa from salary Nil Retired Doctor Two children (age 8 and 9) Accountant and Biochemist AUD175,000 pa (Kit) and AUD130,000 pa (Jo) from salary AUD85,000 pa total from retirement fund and investment portfolio Dependents Occupation Net Income (after super and after tax) Expenses (living and financial) Major assets AUD85,000 pa AUD55,000 pa AUD175,000 pa including the home loan Cash at bank AUD115,000 Superannuation AUD220,000 Cash at bank AUD45,000 Superannuation AUD250,000 Home AUD1.8 million Car AUD25,000 Cash at bank AUD30,000 Superannuation AUD1.8 million Home AUD1.5 million Investment portfolio AUD250,000 Car AUD50,000 Nil Home loan AUD1.2 million Major liabilities (interest only loan) Capital Gains Tax liability from recent sale of investment property AUD35,000 (due for payment within one month) Purchase an apartment within two years (price approx AUD1.3 million) with 15% cash and 85% Continue self funded retirement and Major financial goals Operate a conservative budget until the children complete high school in about 9 years time undertake one overseas holiday each year (approx cost AUD15,000 per holiday additional to normal expenses) bank loan Client Name Tom Kit and Jo Jim 35 45 and 42 71 Age Status Married, home owners Widower (single), home owner Single, renter of Studio apartment Nil Strategy Consultant AUD195,000 pa from salary Nil Retired Doctor Two children (age 8 and 9) Accountant and Biochemist AUD175,000 pa (Kit) and AUD130,000 pa (Jo) from salary AUD85,000 pa total from retirement fund and investment portfolio Dependents Occupation Net Income (after super and after tax) Expenses (living and financial) Major assets AUD85,000 pa AUD55,000 pa AUD175,000 pa including the home loan Cash at bank AUD115,000 Superannuation AUD220,000 Cash at bank AUD45,000 Superannuation AUD250,000 Home AUD1.8 million Car AUD25,000 Cash at bank AUD30,000 Superannuation AUD1.8 million Home AUD1.5 million Investment portfolio AUD250,000 Car AUD50,000 Nil Home loan AUD1.2 million Major liabilities (interest only loan) Capital Gains Tax liability from recent sale of investment property AUD35,000 (due for payment within one month) Purchase an apartment within two years (price approx AUD1.3 million) with 15% cash and 85% Continue self funded retirement and Major financial goals Operate a conservative budget until the children complete high school in about 9 years time undertake one overseas holiday each year (approx cost AUD15,000 per holiday additional to normal expenses) bank loan