Activity 2.7
Group Case Study: Starting Right
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 $60,000 and a net worth of $200,000 to
be eligible to invest in Starting Right.
Corporate bonds would return 11% 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 5 with a good market or see the investment
worth only half 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.
Discussion
Questions
Ignoring the impact of inflation, answer
the following questions:
1.
Ray Cahn, who is currently
a commodities broker, is also considering an investment, although he believes that
there is only a 15% chance of success. What
do you recommend?
