Activity 2.7
Group Case Study: Starting Right
Afterwatchingamovieaboutayoungwomanwhoquitasuccessfulcorporatecareertostartherownbabyfoodcompany,JuliaDaydecidedthatshewantedtodothesame.Inthemovie,thebabyfoodcompanywasverysuccessful.Juliaknew,however,thatitismucheasiertomakeamovieaboutasuccessfulwomanstartingherowncompanythantoactuallydoit.Theproducthadtobeofthehighestquality,andJuliahadtogetthebestpeopleinvolvedtolaunchthenewcompany.Juliaresignedfromherjobandlaunchedhernewcompany—StartingRight.
Juliadecidedtotargettheupperendofthebabyfoodmarketbyproducingbabyfoodthatcontainednopreservativesbuthadagreattaste.Althoughthepricewouldbeslightlyhigherthanforexistingbabyfood,Juliabelievedthatparentswouldbewillingtopaymoreforahigh-qualitybabyfood.Insteadofputtingbabyfoodinjars,whichwouldrequirepreservativestostabilizethefood,Juliadecidedtotryanewapproach.Thebabyfoodwouldbefrozen.Thiswouldallowfornaturalingredients,nopreservatives,andoutstandingnutrition.
Gettinggoodpeopletoworkforthenewcompanywasalsoimportant.Juliadecidedtofindpeoplewithexperienceinfinance,marketing,andproductiontogetinvolvedwithStartingRight.Withherenthusiasmandcharisma,Juliawasabletofindsuchagroup.Theirfirststepwastodevelopprototypesofthenewfrozenbabyfoodandtoperformasmallpilottestofthenewproduct.Thepilottestreceivedravereviews.
Thefinalkeytogettingtheyoungcompanyofftoagoodstartwastoraisefunds.Threeoptionswereconsidered:corporatebonds,preferredstock,andcommonstock.Juliadecidedthateachinvestmentshouldbeinblocksof$30,000.Furthermore,eachinvestorshouldhaveanannualincomeofatleast$60,000andanetworthof$200,000tobeeligibletoinvestinStartingRight.Corporatebondswouldreturn11%peryearforthenext5years.Juliafurthermoreguaranteedthatinvestorsinthecorporatebondswouldgetatleast$20,000backattheendof5years.Investorsinpreferredstockshouldseetheirinitialinvestmentincreasebyafactorof5withagoodmarketorseetheinvestmentworthonlyhalftheinitialinvestmentwithanunfavorablemarket.Thecommonstockhadthegreatestpotential.Theinitialinvestmentwasexpectedtoincreasebyafactorof8withagoodmarket,butinvestorswouldloseeverythingifthemarketwasunfavorable.
Discussion
Questions
Ignoring the impact of inflation, answer
the following questions:
1. RayCahn,whoiscurrentlyacommoditiesbroker,isalsoconsideringaninvestment,althoughhebelievesthatthereisonlya15%chanceofsuccess.Whatdoyourecommend?
