Starting Right Corporation Case Study After watching a movie about a young woman
ID: 2927306 • Letter: S
Question
Starting Right Corporation Case Study
After watching a movie about a young woman who quit a
successful corporate career to start her own baby food company,
Julia Day decided that she wanted to do the same. In
the movie, the baby food company was very successful. Julia
knew, however, that it is much easier to make a movie about
a successful woman starting her own company than to actually
do it. The product had to be of the highest quality, and
Julia had to get the best people involved to launch the new
company. Julia resigned from her job and launched her new
company—Starting Right.
Julia decided to target the upper end of the baby food market
by producing baby food that contained no preservatives but
had a great taste. Although the price would be slightly higher
than for existing baby food, Julia believed that parents would be
willing to pay more for a high-quality baby food. Instead of putting
baby food in jars, which would require preservatives to stabilize
the food, Julia decided to try a new approach. The baby
food would be frozen. This would allow for natural ingredients,
no preservatives, and outstanding nutrition.
Getting good people to work for the new company was
also important. Julia decided to find people with experience
in finance, marketing, and production to get involved with
Starting Right. With her enthusiasm and charisma, Julia was
able to find such a group. Their first step was to develop
prototypes of the new frozen baby food and to perform a
small pilot test of the new product. The pilot test received
rave reviews.
The final key to getting the young company off to a good
start was to raise funds. Three options were considered: corporate
bonds, preferred stock, and common stock. Julia decided
that each investment should be in blocks of $30,000. Furthermore,
each investor should have an annual income of at least
$40,000 and a net worth of $100,000 to be eligible to invest in
Starting Right. Corporate bonds would return 13% per year for the next five years. Julia furthermore guaranteed that investors
in the corporate bonds would get at least $20,000 back at the
end of five years. Investors in preferred stock should see their
initial investment increase by a factor of 4 with a good market
or see the investment worth only half of the initial investment
with an unfavorable market. The common stock had the greatest
potential. The initial investment was expected to increase by
a factor of 8 with a good market, but investors would lose everything
if the market was unfavorable. During the next five years,
it was expected that inflation would increase by a factor of 4.5%
each year.
Discussion Questions
1. Sue Pansky, a retired elementary school teacher, is considering
investing in Starting Right. She is very conservative
and is a risk avoider. What do you recommend?
2. Ray Cahn, who is currently a commodities broker, is also
considering an investment, although he believes that there is
only an 11% chance of success. What do you recommend?
3. Lila Battle has decided to invest in Starting Right. While
she believes that Julia has a good chance of being successful,
Lila is a risk avoider and very conservative. What
is your advice to Lila?
4. George Yates believes that there is an equally likely
chance for success. What is your recommendation?
5. Peter Metarko is extremely optimistic about the market
for the new baby food. What is your advice for Pete?
6. Julia Day has been told that developing the legal documents
for each fundraising alternative is expensive. Julia
would like to offer alternatives for both risk-averse and
risk-seeking investors. Can Julia delete one of the financial
alternatives and still offer investment choices for risk
seekers and risk avoiders? I want plz the table hat we should form for the three cases we have in this case study help me plz find the answer thank u very much
Explanation / Answer
Returns Table
-------------
Favorable Market Unfavorable Market
Corporate Bonds $25,273 -$10,000
Preferred Stock $90,000 -$15,000
Common Stock $210,000 -$30,000
Do Nothing 0 0
1)
Max min
Options for Investors Expected Value(unfavoured market conditions)
------------ --------------
Corporate bonds -$10,000
Preferred Stock -$15,000
Common Stock -$30,000
Nothing $0
Sue Pansky Prefers to avoid risk so she should invest in corporate bonds . The corporate bond generates steady income at the rate 13% per year. Atleast $ 20,000 of her investment will be back at the end of the year.
2.
Maximax
-------
Options for Investors MAX Returns
------------ --------------
Corporate bonds -$25,273
Preferred Stock -$90,000
Common Stock -$2,10,000
Nothing $0
Ray Cahn believes that there is only 11% success.He is not worried about Risk .He should Go for common stock which will give high returns.
3.
Maximin
Options for Investors Expected Value(Unfavorable Market)
---------------------- --------------------------------
Corporate Bonds -$10,000
Preferred Stock -$15,000
Common Stock -$30,000
Do Nothing $0
Lila Battle avoids risk just like Sue Pansky. The minimum or worst outcome for each Option for investors is identified. Thus Lila
should be investing in Corporate bonds
4.
Maximax
Options for Investors max Returns
--------------------- -------------
Corporate Bonds $25,273
Preferred Stock $90,000
Common Stock $210,000
Do Nothing $0
George Yates is very confident about the future of the new company that he is going to invest So he is going to invest in the option which he will have the maximum return. So George Yates should invest in the common stock.
5.
MaxiMax
Options for Investors max Returns
--------------------- -------------
Corporate Bonds $25,273
Preferred Stock $90,000
Common Stock $210,000
Do Nothing $0
Since Peter Metarko is extremely optimistic. Since he is extremely optimistic he should choose the common stock, alternative this
investment ($30,000) would increase by a factor of 8 which is a maximum value. Since Peter is
very confident about the market for baby food and he thinks that it has a good chance
to succeed he will get $2,40,000. he will get max returns $210,000 after taking out the initial investment.It would be a best decision for someone so optimistic in company.
6.Returns Table
-------------
Favorable Market Unfavorable Market
Corporate Bonds $25,273 -$10,000
Preferred Stock $90,000 -$15,000
Common Stock $210,000 -$30,000
Do Nothing 0 0
If we look at the payoff table above, we can see that the risk seekers will look to invest in the
Common stock where if the market is favorable then they will make a profit of $210,000 if
the market is favorable and they will lose their entire investment if the market is unfavorable.
On the other hand, the conservative risk avoiders will look to invest in the corporate bonds.
These people will only lose $10,000 if they invest in corporate bonds, on the other hand, they will make $25,273 on top of the initial investment of $30,000. So, Julia can choose not to
offer the preferred stock option as she can ensure loyalty from both risk seekers and risk
avoiders.
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