De La Salle University

Ramon V. Del Rosario College of Business

Starting Right Corporation

Submitted by:

Cas, Robby
Ditan, Krisha Mae
Mapa, Riz
Villanueva, Jan Carlo
 I. Synthesis / Background of the Company

Julia Day launched her company, Starting Right Corporation (SRC or the Company), after
being inspired by a movie. She envisioned that baby food should have the highest quality.
Julia believes that upper-end parents in the market are willing to pay more for high-quality
baby food that has great taste and contains no preservatives. Having said that, Julia’s
products differentiate from most baby food in the market through freezing, which
eliminates the need for preservatives.

After establishing a team with various expertise in finance, marketing, and production, the
company then came up with their prototypes. The pilot test conducted was successful
which meant that the demand for such a product is present. The final key in getting a good
start for the business is to raise funds. Three options were considered for the potential
investors: corporate bonds, preferred stock, and common stock. There are already five (5)
potential and interested investors for the company.

II. Point of View

The group decided to use the perspective of an underwriter who will intermediate the
funding needs of the company through matching suitable investments for the potential
investors.

III. Statement of the Problem

How will the underwriter effectively match investment opportunities to the potential
investors and ensure that the funding needs of the Starting Right are met?

IV. Statement of Objectives

1. To provide a thorough quantitative and qualitative analysis of investment options for

the potential investors.
2. To give thorough recommendation of an investor involvement based on proper fit given
their risk profiles and investment behaviors.
3. Formulate an implementation plan to facilitate the capital raising.

V. Areas of Consideration

TOWS Matrix
Starting Right Corporation
Threats Opportunity
● Success is highly dependent on ● Demand is present due to a
market factors (i.e., good or bad) a successful pilot test;
bad market will severely deteriorate ● Early investment may prove more
investment value; profitable
 Weakness
● Higher price compared to market
alternatives;
● Low brand recognition/product
awareness due to start-up phase;
Strengths
● Differentiated from the market (i.e.,
frozen, not preserved);
● Higher-quality and healthier
alternative to normal baby food;

Investment Options
Julia is prepared to offer three investment options for the potential investors, namely
corporate bonds, preferred stock, and common stock. Investing on these securities have
different implications for an investor. A summary of the the qualitative characteristics are
displayed as pros and cons in Part VI.

Potential Investors
The following are the five (5) potential investors with a brief description of their
investment behaviors, and/or risk profiles (if available):

Name Description

Sue Pansky Conservative and risk-avoider. Knowledge of market risk is not reliable.

Ray Cahn Believes that there is only an 11 percent chance of success. Knowledge of
market risk is reliable.

Lila Battle Conservative and risk-avoider. Knowledge of market risk is not known.

George Yates Believes that success/failure is equally likely. Knowledge of market risk is not
known.

Peter Malarko Extremely optimistic. Knowledge of market risk is not known.

The said profiles were facts of the case. For knowledge of market risk, the group deemed
that Ray Cahn has a reliable grasp of risk, given his occupation as commodities broker. The
group also deemed that the rest of the investors do not have a reliable grasp of market risk
given their occupation (i.e., Sue Pansky as a retired teacher) or the fact that the reliability
cannot be determined.
Potential Returns

The following table summarizes the potential returns of each funding source in the
perspective of investors, given their market conditions:
 Good Market Bad Market

Bond $19,500 ($10,000)

Preferred Stock (PS) $120,000 ($15,000)

Common Stock (CS) $240,000 ($30,000)

No Investment ($7,385) ($7,385)

The table above presupposes the following facts and assumptions:

1. Investment should be in blocks of $30,000;
2. Bond returns were based on the 13 percent simple interest rate, and a $10,000 loss
given a guaranteed $20,000 pay-off on a bad market;
3. PS returns were based on the growth factor of 4 on a good market, and loss of half
the investment value on a bad market;
4. CS returns were based on a growth factor of 8 on a bad market, and total loss of
investment value on a bad market; and
5. Inflation would increase by a factor of 4.5% each year, thus the absence of
investment would deteriorate $30,000 by the rate of inflation.

VI. Alternative Courses of Action (ACAs)

An underwriter can recommend any of the following courses of action for each of the
potential investors:

Alternative Courses of Pros Cons

Actions

ACA 1 Recommend to ● Fixed cash flow due to ● Rate of return is lower

invest in corporate contractual terms of the bond compared to equities
bonds ● Seniority in claims on assets ● Relatively illiquid compared
● Guaranteed return to equities, and value is
exposed to movements in
market interest rates.
● Does not have ownership
claims in the company

ACA 2 Recommend to ● Guaranteed dividends and ● Consistency/fixedness of

invest in preferred higher seniority in claims in
stock income
● Ideally fixed cash flow in
perpetuity
● Higher value potential
dividends depends on
performance of the company
● Normally does not participate
in profits after guaranteed
dividend
 depending on company ● Typically has no voting rights
performance. in the company
● Has junior claims compared
to debt holders

ACA 3 Recommend to ● Highest earning potential in ● Has the most junior claims in
invest in common capital gains if the company the assets of the company
stock is successful ● Dividend is highly
● Highest dividend yields if the discretionary and would
company is successful depend on the success of the
● Voting rights in the company company
● Can be held in perpetuity ● Riskiest asset because it does
not offer any security

ACA 4 Recommend to not ● Total risk aversion ● Opportunity cost of investing

invest in other securities and no
capital
preservation/protection from
inflation.

ACA 5 Recommend ● Guaranteed investment for ● Higher legal cost of

investment options the business according to the underwriting
to different preferences of different ● Different implications in
stakeholders stakeholders capital structure

VII. Recommendations

Matching of Risk Profiles and Investments using Decision Analysis

Matching of investors and investments will be done using decision analysis models. With
the exception of Ray Cahn, each of the investors are recommended investments using
decision making under uncertainty. These investors are matched with decision-criteria
based on their investment behaviors. For Mr. Cahn, however, decision-making under risk
criterion is used. The following table displays the results of decision analysis for each
investor, criteria used, and their suitable investment:

Name Decision Criteria Recommendation

Sue Pansky Maximin (Conservative) Do Not Invest

Ray Cahn Expected Monetary Value Preferred Stock

Lila Battle Maximin (Conservative) Do Not Invest

George Yates Laplace (Equally Likely) Common Stock

 Peter Malarko Maximax (Optimistic) Common Stock

The supporting computations are displayed in Appendix A and were generated using QM
for Windows. The decision analysis methods helped initially identify which investments
will yield the most attractive for each of these people with respect to their behaviors and
the potential pay-offs of each investment. Based on our computations, $60,000 common
stock and $30,000 preferred stock should be underwritten. Thus, different investment
options must be offered (ACA5).

Ethical Considerations
1. Self-interest threat. Clients often incentivize financial services firms to act unethically to
achieve their goals (Federwisch, 2015). Hence, some recommendations of intermediaries
are often skewed in favor of a client in order to reap additional income.
2. Moral hazard. This occurs when an agent performs an action non-observable to his
principal, or hides information a principal could not acquire (Do, 2003).
3. Legality over ethicality. Many companies are content with the fact that the legal form of
the documents, not minding if there are other ethical implications outside the legal form
of contracts (Federwisch, 2015).
4. Consumer protection. Financial service providers must adequately discuss their clients of
the terms and conditions of any products/services provided.

VIII. Implementation Plan

What Who

Step 1 Match the risk profiles and investments to different potential Underwriter
investors based on the results of the computations above.

Step 2 Identify the growth portfolio of investment risks Underwriter

Step 3 Prepare and execute the legal documents/requirements for Underwriter

common stock and preferred stock necessary to undertake the Legal
deals. Day, Cahn, Yates,
Malarko

Step 4 Facilitate transfer of capital from investors to investee and Underwriter

finalize the transaction Transaction
Participants
Appendix A - Computations Using QM for Windows

Figure 1. Decision Tree with Resulting EMVs

Figure 2. Payoff Tables and Results of DM under Uncertainty

Appendix B - References

● Federwisch (2015). Ethical issues in the financial services industry. Retrieved from:
https://www.scu.edu/ethics/focus-areas/business-ethics/resources/ethical-issues-in-the-
financial-services-industry/
● Do (2003). Asymmetric information. Retrieved from:
https://siteresources.worldbank.org/DEC/Resources/84797-
1114437274304/Asymmetric_Info_Sep2003.pdf
● Pirraglia (n.d.). What are the differences between debt & equity investments? Retrieved
from: https://finance.zacks.com/differences-between-debt-equity-investments-3035.html
● Render et. al. (2015). Quantitative analysis for management 12th edition. London:
Pearson