Case Study Starting Right Corporation

After watching a movie about a young woman who quit a successful corporate career to start a baby food company, Julia Day decided 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 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 and launched the 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 that 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 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 $$100,000$ to be eligible to invest in Starting Right. Corporate bonds would return $13\%$ per year for the next $5$ years. Julia furthermore guaranteed that investors in the corporate bonds would get at least $$20,000$ back at the end of $5$ 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 $5$ years, it was expected that inflation would increase by a factor of $4\mathrm{.}5\%$ each year.

Construct a Payoff Table

Construct a Regret Table

Sue Pansky, a retired elementary school teacher, is considering investing in Starting Right. Sue 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 it is believed that there is only an $11\%$ chance of success. What do you kecommend?

Lila Battle has decided to invest in Starting Right. While Lila believes that Julia has a good chance of being successful, Lila is a risk avoider and is very conservative. What is your advice to Lila?

George Yates believes that there is an equally likely chance for success or failure. 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 del$$te one of the financial alternatives and still offer investment choices for risk seekers and risk avoiders?

Complete the case requirements of the Case Study Starting Right Corporation as part of the homework for this module $($remember to include do nothing alternative during your analysis$).$ Use the link to upload your solution $($Using MS Word, MS Excel or PDF$)$ into the blackboard system. While submitting the homework, students are required to follow the file naming convention which is: $>$Last$\_$Name$>>$initial of the first name $>$ BUAD $360-01$ HW$>$ number$>($for example the Home Work of Laura Smith for Chapter $3$ will be named as SMITHL BUAD $360-01$ HW$-3).$

Payoff table

$\backslash$table$[[2,,$Favorable,Unfavorable,Laplace$],[3,$Decision Alternatives,Market,Market,$\backslash$table$[[$Average$],[$Value$]]],[4,$Do Nothing,,,$],[5,$Bonds,,,$],[6,$Preferred Stock,,,$],[7,$Common Stock,,,$],[8,$Best,,,$],[9,,,,\backslash$table$[[$Average payoft$],[$of the two cvents$]]],[10,$Regret table,,,$],[11,,$Favorable,Unfavorable,Maximum$],[12,$Alternative,Market,Market,Regret$],[13,$Do Nothing,,,$],[14,$Bonds,,,$],[15,$Preferred Stock,,,$],[16,$Common Stock,,,$],[17,,\backslash$table$[[$Best minusa$],[$amounts$]],$ternative payoff,$\backslash$table$[[$Maximum of$],[$the regret$],[$values$]]]]$