Case Study, Decision Analysis â Starting Right Corporation
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 â 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.
Sue Pansky, a retired grade-school teacher, is considering investing in
Starting Right. She is very conservative and is a risk avoider. What
do you recommend?
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?
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?
George Yates believes that there is an equally likely chance for
success. What is your recommendation?
Peter Metarko is extremely optimistic about the market for the new baby
food. What is your advice for Pete?
Julia Day has been told that developing the legal documents for each
fund-raising 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 both risk seekers and risk avoiders?
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