Arundel : Options Case Essay

1669 Words Sep 20th, 2013 7 Pages
Arundel Partners – The Sequels Project

After evaluation of the proposed acquisition of the movie sequel rights, we recommend to offer movie studios as a per-movie price to purchase the sequel rights for their entire portfolio of movies the studios are going to produce over the next year.

Arundel should make an offer to buy sequel rights as the average NPV (on a per film basis ) is $5.51 mn (this is the value calculated using real options method).
Hence, we should pay a price below $5.51mn. As per informal inquiries made by us, the studios would be tempted to accept the price of $2mn or more and would not even consider a price below $1mn.

We propose that we should negotiate for the price of $2mn. This would give us a profit of
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The results are as below

Studio | Average value of sequel rights per film( in $mn) | MCA UNIVERSAL | 12.3 | PARAMOUNT PICTURES | 5.12 | SONY PICTURES ENTERTAINMENT | 4.89 | TWENTIETH CENTURY FOX | 3.33 | WARNER BROTHERS | 12.17 | THE WALT DISNEY COMPANY | 17.68 | All Studios | 8.61 |

Drawbacks and improvements of the DCF analysis method

DCF models underestimate the value of investments where there are embedded options to follow up with a second investment if the first one does well (follow-on option)

1. Discount rate: The analysis assumes that the discount rate is the same for the complete throughput time of the project. This can be countered by using different discount rates for different years, in case required.
2. Static model: Once the decision to go for the project has been made, possible future changes are not taken into account anymore. It does not account for future decisions (such as hold or abandon a part of the project) based on better information or change in scenario. The NPV of the project should be split in multiple projects whereby the decision is postponed until more information is known about a particular part of the project
Valuation of Sequel rights using Real Options model
Reason to use options model

The valuation of sequel rights involves contingency. This makes options model a better tool for this analysis since it is dynamic. Using

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