I.

Background on company
Starting Right Corporation (SRC) is a start-up business established by Julia Day. It is
engaged in production of baby food that contained no preservatives but had a great taste. Their
primary targets are parents who are willing to pay higher prices for a product that has excellent
quality. In order to avoid preservatives, SRCs baby food is frozen as compared to ordinary food
that is placed in jars.
Upon building her business, Julia Day also hired people to help her in the different
aspects of the corporation like Finance, Marketing and Production. The companys 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.

II.

Identification of the Problem

To assist the growth and raise capital of her company, Julia decided to seek alternative
investments for the company. She wanted to cater to both risk-taker and risk-avoiding investors
and thus she considered three options: (1) corporate bonds, (2) preferred stock, and (3) common
stock. For all three investment, Julia set requirements for the investors and ensured the
corresponding returns on favorable and unfavorable market conditions (as stated in the below
case facts). The main problem now is for the investors to identify to which of the alternatives
will yield to a higher return to their investment. Another problem raised was since legal
documents in putting up the alternative investments, Julia faces the decision whether she can
eliminate one of the alternative investments by still catering to both risk-averse and risk-taker
investors.

III.

Case Facts
1.
2.
3.
4.
5.
6.

Each Investment should be in blocks of $30,000.00

Investor's annual income should be at least $40,000.00
Investors net worth should be $100,000
Corporate Bonds would return 13% per year for the next five (5) years
Investors who invest in Corporate Bonds would get at least $20,000.00 back
Investments in Preferred Stock either have an increase by a factor of 4 with a good market or see
half of the initial investment with an unfavorable market
7. Investments in Common Stock either have an increase by a factor of 8 with a good market or
lose everything with an unfavorable market
8. Inflation would increase by a factor of 4.5% each year in the next five years

Investors Profile
Sue Pansky - Retired Elementary School teacher, conservative, and risk-avoider
Ray Cahn - Commodities Broker, believes there is 11% chance of success
Lila Battle - Risk avoider and very conservative, believes on a good chance of the company to
be successful
George Yates - Believes on equally likely chance for success on the company
Peter Metarko - Optimist
Alternative investment choices for both risk-averse and risk-seeking investors

IV. Assumptions
Chances of unfavorable and favorable are 50%, as it is not directly stated in the problem.
To simplify computations and analysis, unfavorable and favorable market conditions are scoped
into a five year span.
Computations are based on the assumption that investors are investing the minimum bulk of
investment worth 30,000.
V.

Alternative Courses of Action/ Quantitative Method Application

In order to determine the best investment option available for the investors, the
group used decision making under uncertainty or risk. Assuming that each investor
invests with the minimum bulk of investment, which is 30,000, we were able to formulate
the payoff table below:

Note: *Hurwitz factor used was 0.11 from the assumption for investor - Ray Cahn

Using the decision table, we were able to arrive to a conclusion that Maximax and EMV
method analyses are supportive of taking the 4 th alternative which is the common stocks as
alternative investment to Starting Right Corp as it yields highest return, considering that a 5050% chance of have a favorable and unfavorable market. This is opposed to the analysis using
Maximin approach as all alternatives will only yield a negative payoff / investor just ending up
losing invested money, thus investor ought to do nothing or not to invest at all considering the
worst payoff in an unfavorable market. This approach will be most applicable to investors who
are risk-avoiders and cant afford to lose money on a negative forecast on the market conditions.

The group also looked at the Regret or Opportunity Loss Table in order to weigh
investments options offered by Starting Right Corp. This method represents finding the lesser
amount lost (opportunity loss or regret) by picking the best alternative in a given state of nature.
From the table, we can see that Alternative 4 which is the Common Stocks gives the lowest
opportunity loss.
Summary
A. Maximax = best option given by Alternative 4 - Common Stocks at $240,000
B. Maximin = best option given by Alternative 1 - Do nothing at $0
C. Equally likely or Laplace = best option given by Alternative 4 - Common Stocks at
$105,000
D. Hurwicz = best option given by Alternative 1 - Do nothing at $0
E. Minimax Regret = best option given by Alternative 4 - Common Stocks at $30,000

VI.

Ethical Considerations

Julia Day and Starting Right Corp. must take note of the following ethical considerations in
order to build a strong and trustworthy company in the eyes of its consumers and investors:
1. Since the frozen baby food would no longer be put in jars, the new packaging must be taken into
consideration. Container of the frozen product must not produce harmful wastes that are not
good for the environment.
2. Since it has no preservatives, Starting Right Corp. should make their consumer aware of its
expiry date. The idea of frozen products may mislead them. In addition, quality control should
be a priority.
3. Freezing of the baby food may need to consume a lot of energy (electricity for freezers) which is
not good for the environment.
4. Since this kind of idea is new in the market, consumers should be given correct and full
information for their protection and safety.
5. Investors should be given relevant information like product knowledge, marketing plan and
others. Transparency should be practiced by the corporation.
VII.

Conclusion

Sue Pansky
We can conclude that considering the risk profile of Sue, she ought not to invest at all in Starting
Rights Corp as being a risk-avoider and conservative investor; Sue cannot afford to lose her
money especially on an unfavorable market condition. Sue would rather invest on something that
will yield her money even at a small scale, as long as there is assurance on a positive payoff,
regardless of the market condition. As seen in the decision table analysis, all investments yield to
a negative return on an unfavorable market condition, thus recommendation for Sue would be to
not to invest in Starting Rights Corp.
Ray Cahn
For Ray, the best decision is not to invest or to do nothing. He used the 11% chance of success as
his coefficient for realism. As we can see here, 11% is a very low and is leaning towards
pessimism which is not good for investors.
Lila Battle
Being a conservative investor, we recommend that Lila also do nothing and do not invest in
Starting Rights Corp. Likewise as explained in Sues case, all alternatives yield to a negative
payoff on an unfavorable market. Even if Lila is positive on a favorable market condition, she
may not be able to handle loss of her investment as she is still considered a conservative investor.
George Yates
Being a believer on the equal chances of having a favorable and unfavorable market condition,
George still ought to invest in common stock as well. EMV as well as the opportunity and regret
table shows that alternative being with the highest payoff least regret. Investing in common stock

will help George maximize his investment opportunity and have the least regret in the 50%
chance success or failure of the company.
Peter Metarko
Peter ought to invest on common stock. Being an optimist, he will be able to maximize his utility
by investing on the investment with the highest payoff. As shown in our maximax analysis,
common stocks will yield him up to $240,000, highest among all investments.
Alternative investment choices for both risk-averse and risk-seeking investors
Julia may not offer Preferred Stocks and instead offer other options like do nothing or common
bonds to the risk averse/ avoider and common stocks to the risk takers.
From this case, the group learned that investing can be a highly emotional experience
both for the investors and the company. The possibility of gaining or losing a significant amount
of money is a risk investors are willing to take but only up to an extent. The quantitative methods
used in this case can give investors an idea of the potential gains and losses involved. While
making money is a goal every investor can understand, quantitative analysis can also be used to
reduce risk.