After watching a movie about a young woman who quit asuccessful corporate career
ID: 2917297 • Letter: A
Question
After watching a movie about a young woman who quit asuccessful
corporate career to start her own baby food company, Julia Daydecided
that she wanted to do the same. In the movie, the baby food companywas
very successful. Julia knew, however, that it is much easier tomake a
movie about a successful woman starting her own company than toactually
do it. The product had to be of the highest quality, and Julia hadto
get the best people involved to launch the new company. Juliaresigned
from her job and launched her new company- Starting Right.
Julia decided to target the upper end of the baby food marketby
producing baby food that contained no preservatives but had agreat
taste. Although the price would be slightly higher than forexisting
baby food, Julia believed that parents would be willing to pay morefor
a high-quality baby food. Instead of putting baby food in jars,which
would require preservatives to stabilize the food, Julia decided totry
a new approach. The baby food would be frozen. This would allowfor
natural ingredients, no preservatives, and outstandingnutrition.
Getting good people to work for the new company was alsoimportant.
Julia decided to find people with experience in finance, marketing,and
production to get involved with Starting Right. With her enthusiasmand
charisma, Julia was able to find such a group. Their first step wasto
develop prototypes of the new frozen baby food and to perform asmall
pilot test of the new product. The pilot test received ravereviews.
The final key to getting the young company off to a good start wasto
raise funds. Three options were considered: corporate bonds,preferred
stock, and common stock. Julia decided that each investment shouldbe
in blocks of $30,000. Furthermore, each investor should have anannual
income of at least $40,000 and a net worth of $100,000 to beeligible to
invest in Starting Right. Corporate bonds would return 13% per yearfor
the next five years. Julia furthermore guaranteed that investors inthe
corporate bonds would get at least $20,000 back at the end offive
years. Investors in preferred stock should see their initialinvestment
increase by a factor of 4 with a good market or see the investmentworth
only half of the initial investment with an unfavorable market.The
common stock had the greatest potential. The initial investmentwas
expected to increase by a factor of 8 with a good market, butinvestors
would lose everything if the market was unfavorable. During thenext
five years, it was expected that inflation would increase by afactor of
4.5 % each year.
Discussion Questions:
Sue Pansky, a retired grade-school teacher, is consideringinvesting 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 alsoconsidering an
investment, although he believes that there is only an 11% chanceof
success. What do you recommend?
Lila Battle has decided to invest in Starting Right. While shebelieves
that Julia has a good chance of being successful, Lila is a riskavoider
and very conservative. What is your advice to Lila?
George Yates believes that there is an equally likely chancefor
success. What is your recommendation?
Peter Metarko is extremely optimistic about the market for the newbaby
food. What is your advice for Pete?
Julia Day has been told that developing the legal documents foreach
fund-raising alternative is expensive. Julia would like tooffer
alternatives for both risk-averse and risk-seeking investors. CanJulia
delete one of the financial alternatives and still offerinvestment
choices for both risk seekers and risk avoiders?
Explanation / Answer
I got question 1-4,
1. Sue Pansky, a retired elementary school teacher, is considering inesting in Starting Right. She is very conservative and is a risk avoider. What do you recommend?
We believe that if Sue is going to invest in Starting Right she needs to do it in the form of corporate bonds. This is due to the fact that there is a projection of a 13% gain year over year and Julia has guaranteed the investors will receive a minimum of $20,000 back after a five year period. Corporate bonds are also less risky due to the fact that if the corporation fails then the bonds are paid before the stockholders receive any money back. Furthermore if Sue was to purchase preferred stock she could lose up to half of her investment on the worst case scenario and in common stock she could lose all of her investment.
Looking at these scenarios and Sue%u2019s situation, with being retired and most likely not wanting to start a new career, she needs to find investments that are low risk but still provide a return. This why a corporate bond would be the best option for her, low risk on the investor but also a low reward.
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?
We believe that Mr. Cahn should go with the common stock alternative option because it will give him the highest payoff.
Common Stock according to the Business Dictionary dot com is a type of security that serves as an evidence of proportionate ownership, imparts proportionate voting rights, and gives its holder unlimited proportionate claim on the assets and income of the firm (after the claims of lenders, and other obligations, are satisfied). Common stock constitutes the equity capital (also called risk capital) of the firm which is never paid back (redeemed), and is lost if the firm fails. Common stock usually has a par value (amount for which each share is sold for when first issued) but has no guaranteed value afterwards. In bad years, common stock holders may receive little or no income (dividends) at all. But, in good years, there is no limit to the amount they may receive except the limits imposed by the government, the lenders, or the financial position of the firm. Common stock holders elect directors of the firm and thus participate in determining its policies and direction. But their claims on the firm%u2019s assets are subordinate to those of debenture holders, preferred stock (preference share) holders, creditors, and statutory agencies (such as tax authorities). On the winding up of the business, the surplus of the assets over liabilities is divided among common stockholders in proportion to their stockholding.
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?
There%u2019s an old saying %u201CIn order to make money, you need to spend money%u201D. Nothing in life is a guarantee and but in question one Sue Pansky is taking the same chance and in investing into this company that is very new with a great concept. Julia has laid out a very well plan of a product and has already received great feedback from the public. Julia has even laid out the minimum and/or worst outcome for each alternative that is identified with your investment. If Ms. Battle wants to still play it safe, I would select corporate bonds that reflect a pessimistic decision approach to her investment. A corporate bond is a bond issued by a corporation; carries no claim to ownership and pays no dividends but payments to bondholders have priority over payments to stockholders; "a corporate bond is a safer investment than common stock in the same company"(Corporate, 2013).
4. George Yates believes that there is an equally likely chance for success. What is your recommendation?
Our recommendation to George Yates would be to purchase preferred stock from Starting Right. We believe this due to the fact that George believes there is a 50% chance that the company will succeed. In buy preferred stock George has a chance for greater reward than buying bonds but also will not lose all of his investment like the common stock option if the company fails. By George saying he is equally confident in the success and failure of the company means he is not sure if it will succeed or fail and thus should not risk an entire investment on an uncertainty he feels in the company. If George ever feels that a greater likely hood of success of Starting Right then he can look into purchasing common stock since he has a higher certainty of success over failure.