Case 1 . Arundel Partners: The Follow up Project
1 . For what reason do the rules of sciene of Arundel Partners believe they can make money buying video sequel legal rights? Why do the partners are interested a collection of privileges in advance instead of negotiating movie-by-movie to buy these people? The principals at Arundel Partners assume that there is benefit that is not captured in a discounted cash flow the moment analyzing the launching of your film. Consider that by launching a brand new film, there may be immediately a possibility to kick off a follow up that can make future money flows not accounted in the discounted income. Since setting up a sequel of your original film is no obligation, the studio can wait and see if the original film had a positive net present value and decide whether to go forward with the job. By valuing the legal rights of the video sequels and offering them to investors like Arundel, the producers of the film can obtain financing for the early stages of the first film. More over, Arundel feels that simply by valuing these types of rights utilizing a Black-Scholes Option Pricing version, they can compute a value for the legal rights to produce these types of sequels and take a position by investing in a portfolio conformed of these privileges. Arundel Associates plans for making money simply by negotiating a possibility price listed below its net present value calculation and obtaining it is expected comes back on the option. If indeed a movie turns into a sequel then this value of the option raises and Arundel will both exercise the right to make the follow up or promote the right both to the original studio or possibly a third party ready to take on the project. The principals for Arundel Companions are inclined to buy a profile of all these kinds of sequel legal rights rather than individual films considering that Arundel wants to avoid buying the rights of films that are not expected to perform well. Arundel would need to find out exactly the number of films plus the name in the films that will make part of the individual selection. As well, buying a collection diversifies the chance of a movie certainly not becoming a follow up considering that almost all films don’t have sequels in this article. Also, shopping for an individual choice to a follow up could create offers for the studios obtain more money on the movie with all the same possible outcome the place that the studio has the privileges to a follow up rather than Arundel.
2 . Estimation the per-movie value of a portfolio of sequel rights such as Arundel proposes to get. Use both a discounted income (DCF) way and Black-Scholes option value approach. Cheaper Cash Flow Approach
Using the info for hypothetical sequels, all of us calculated the NPV of each of these sequels considering that the near future net inflows would be received in 5 years and the future unfavorable cost would be incurred in 3 years. With it, we came with a per-sequel NPV as we are able to see in Show 1 . But Arundel associates will not help to make a follow up of each movie that they buy the rights to. They have the option to make or not associated with sequel in the future, depending on the particular NPV of each and every specific follow up is. To account for this kind of, we simply considered these movies in which a sequel has a Positive NPV (26 of which from the sample provided). Then simply, we worked out the per movie worth to be $4. 958 , 000, 000, since we must consider 99 movies in this calculation because we get them as a package. We can see in Exhibit a couple of the comes from this method. Black-Scholes Option Valuation
Again, all of us used the information for the hypothetical sequels and their anticipated inflows and costs. We know that for the Black-Scholes valuation we need selected parameters, therefore we employed for the current share price (S0) the average inflows from the 99 sequels, cheaper to today. For the strike selling price (K), we used the standard negative costs of the sequels. The standard change is the standard deviation in the 1 year returns, but since T is usually 3 years, we need to account for this kind of, so we all divide the normal deviation from the returns obtained in the sample (121%) to get the sq ....