Case Study1: Decision Analysis

Angelica Lorraine "Angel" Zapanta, a young mom, decided to quit her successful banking career to start
her own retail company focusing on baby clothes. She wanted this product to be of the highest quality,
and Angelica had to get the best people involved to launch the new company – Baby's Angel.

Angel decided to target the A and AB market for her baby's clothing line by producing quality and stylish
baby clothes. Getting good people to work for the new company was also important. She decided to find
people with experience in finance, marketing, and production to get involved with Baby's Angel. With her
enthusiasm and charisma, Angel was able to find such a group. Their first step was to develop designs
and samples of the new clothing line. The samples received excellent 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. Angel decided that
each investment should be in blocks of P300,000. Furthermore, each investor should have an annual
income of at least P400,000 and a net worth of P1,000,000 to be eligible to invest in Baby's Angel.
Corporate bonds would return 13% per year for the next five years. Angel furthermore guaranteed that
investors in the corporate bonds would get at least P200,000 back at the end of five years. Investors in
preferred stock should see their initial investment increase by a factor of 4 with a good market or see the
investment worth only half of the initial investment with an unfavorable market. The common stock had
the most significant 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 were unfavorable. During the next five years, it
was expected that inflation would increase by a factor of 4.5%each year. Angel has been told that
developing the legal documents for each fundraising alternative is expensive. Angel would like to offer
alternatives for both risk-averse and risk-seeking investors. Can Angel delete one of the financial
alternatives and still offer risk seekers and risk avoider investment choices?

The following Diagram illustrates Maximin, and Maximax.

Type of Initial Good Bad Market Investment Row Min Row Max
Investment Investment Market after 4.5%
Inflation
Corporate 300,000.00 200,000.00 39,000.00 286,000.00 39,000.00 286,000.00
Bonds
Preferred 300,000.00 400,000.00 150,000.00 138,000.00 136,000.00 400,000.00
Bonds
Common 300,000.00 800,000.00 800,000.00
Stocks
Maximum Minimum
 1. LealaineTolentino, a stylish advertising manager, is considering investing in Baby's Angel.
She is very conservative and is a risk avoider. 

Taking into major consideration of Lealaine Tolentino’s personality as stated in the problem, the best
choice of her investment should be at Corporate bonds. Using Maxim (pessimistic) criteria for making
decision under uncertainty suggests to choose the best of the worst pay off. Using this strategy, corporate
bonds can guarantee Lealaine at least 13% under any condition within the next 5 years plus 200,000
pesos. Investment will be 286,000 with 4.5% inflation rate per year. This is the best option for Lealaine
using Maximin.

2. Athena Calma, a real estate broker and young mom of 2, is also considering an investment,
although she believes that there is only a 75% chance that the market is favorable.

Finding for an investment is the best decision in some like Athen Calma in here belief that there is 75%
chance of market is favorable, should invest at Common Stocks. . As an investor, she should consider the
alternative that maximizes the maximum payoffs. Maximax looks for the best payoff among the 10
alternatives. For Using Maximax criteria, corporate Bonds is the best option for Athena because it can
give her 800,000 payoffs under a very favorable condition.

3. Myra Lim has decided to invest in Baby’s Angel.  While she believes that Baby’s Angel has a
good chance of being successful, but she doesn’t want to regret making a wrong decision.

Alternatives Good Market Bad Market After Inflation Maximum Regret

Corporate 600,000.00 111,000.00 0 regret 600,000.00
Bonds
Preferred Bonds 400,000.00 0 regret 149,500.00 400,000.00

Common Bonds 0 regret 150,000.00 286,000.00 286,000.00

Myra Lim also should use Minimax Regret decision theory, and therefore invest at Common Stocks. The
illustration above indicates that the minimum regret is 286,000 pesos and therefore should be the option
for Myra Lim.

4. Charlyn Ang believes that there is an equally likely chance for success.

Alternatives Good Market Bad Market After Inflation Maximum Regret

Corporate 600,000.00 111,000.00 0 regret 600,000.00
Bonds
Preferred Bonds 400,000.00 0 regret 149,500.00 400,000.00

Common Bonds 800,000.00 0 0 286,000.00

Charlyn Ang believes that there is an equally likely chance for success, therefore, should
invest in Common Stocks. Equally likely criteria consider all the payoffs of all alternatives and
select the alternative with the highest average. As illustrated above, common stocks offer good
alternative for equally likely criteria.

5. Jeanne Navarra is extremely optimistic about the market for the new baby clothing line.

Jean Navara having an extremely optimistic in terms of market new investment and therefore
should use Maximax criteria for choosing alternative. Common Stocks should Jean’s option since
this offers highest and very promising return investment choices where she will get 800,000.00
payoffs.