Arundel Partners: The Sequel Project
The maximum per-film price for the sequel rights that Arundel Partners should pay is $5.12M.
If Arundel Partners were to use the traditional DCF methods to find the value of the sequel rights, the NPV would be -$8.42M loss per-film (see Appendix 1).
Calculation Details
We assume that Arundel Partners will purchase a portfolio of films similar to one used in the analysis. The average hypothetical net inflow of the sequel ($21.57M) is used to figure out the value of the state variable for the real options model. The state variable is the average hypothetical net inflow of the sequel, discounted using a WACC of 12.36% back to 1989. Discounting back to 1989 is important because this is the time of the
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This approach allows for valuing real assets with some degree of operating flexibility, incorporating the value of the flexibility into the option price. It values the option to exercise but not the obligation to make future investments. It is based on the law of one price (the price of two portfolios with the same cash flows in every state of the world must be the same). Option value increases with great uncertainty (see Exhibit 3). The major uncertainties are Arundel Partners’ WACC and volatility of return on assets. A sensitive analysis shows the degree of changes with the changing uncertainties. The major disadvantage of this approach is that it often requires changes in business process. In Arundel Partners’ case, the terms and provisions in the contract will mitigate some of the disadvantages.
Additional terms and provisions for the sequel rights portfolio
The terms and provisions for the sequel rights for one or more studios’ entire production:
The maturity or expiration rate of exercising the sequel rights is 1 year. This will allow Arundel enough time to make a decision about making a sequel and enable it to more quickly write off its investment in rights it chose not to exercise.
Arundel Partners can chose to produce the sequel or hire another firm to do so.
Arundel Partners will grant right of first refusal to the studio on any rights it planned to sell. If the studio is not interested, Arundel Partners can sell the rights to the highest
This is a formal complaint submitted to BHP/DCA against Frank Pinelli, Quantum Developers LLC (Developer) Condominium Association: Cedar Woods Condominium Association (Board) and Jim Polos, Midlantic Property Management.
The maximum per-film price for the sequel rights that Arundel Partners should pay is $5.12M.
A group of investors (Arundel group) is looking into the idea of purchasing the sequel rights associated with films produced by one or more major movie studios. Movie rights are to be purchased prior to films being made. Arundel wants to come up with a decision to either purchase all the sequel rights for a studio's entire production during a specified period of time or purchase a specified number of major films. Arundel's profitability is dependent upon the price it pays for a portfolio of sequel rights. Our analysis of Arundel's proposal includes
With the purchase of sequel rights, what Arundel is achieving is to have a call option on the revenue that each movie brings. This helps to remove the uncertainty and risks associated with producing a movie, especially with regard to moviegoers’ taste. With the sequel right, Arundel will only exercise this option to produce a sequel if the first movie proved to be popular and the sequel is hence predicted to bring in profits. This provides downside protection, as huge losses (due to high production costs) associated with a failed movie will be avoided.
1. Which firms are the “identical twins” of the Collinsville investment? Using the β’s for those assets and the methodology learned in this course, determines the appropriate discount rate for the Collinsville investment.
Decision Making Area 3:Investment Decisions * Table of Articles * Summary of Articles * Observations * Conclusion
Arundel can make money selling the rights to a higher bid. Another option to make money is by producing the sequel exercising its rights but this will depend on if the net present value of the production movies is higher than the amount of buying the rights. If the future positive cashflows are undervalued Arundel can seek an arbitrage
11. Returning the risk free rate to 4%, what happens to the value of the option if the Whirlpool’s cost of capital goes from 9% to 15%?
5. Assume that a maximum of ten sequels can be made in any given year (choose the sequels that are most likely to be made—for example if the main character in the film dies then a sequel is unlikely to be made) Using the same decision-tree approach, what would you estimate to be the per-movie value of the sequel rights to the entire portfolio of 99 movies released in 1989 by the six major studios?
Based on the previous module assessments, NBC Universal’s preliminary focus should be geared toward the film industry. The recent trade deal, between both the U.S. and Chinese Governments, lowered a 20-year-old quota on U.S. films and distribution fees in the Chinese film industry. This signifies productive progression within the film industry, even though small in nature, but nonetheless this could equate to significant profit gains for all the FMO’s within the market.
The discounted cash flows seems like a simpler approach, with a less complex method to compute the value of the sequels and easier to understand, both for Arundel Partners and for the studios. It requires only a few variables (inflows and costs in this example) and gives the intrinsic value of the project that is being analyzed, not a comparison against similar projects.
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.
Assessing the likelihood of each option and assigning weight to each possibility is an inexact science, but I believe it in unlikely that in the current political climate we will not see both a reduction in the tax rate and an increase in the length of time over which we are required to depreciate capital assets. I have assigned weights to each option with this in mind, and have come up with an average weighted estimate of the net present value of the investment of: $1.7 million.
However, it is important to remember that the APV valuation and the option valuation calculations in Exhibit 1 and 3 aren’t straight forward comparable, since APV assumes financing the acquisition with new $300 million debt and real option valuation is calculated assuming total equity financing. If the tax rate remains constant, the real option valuation could be performed by taking the present value of the tax shields into account. In this case the values obtained by real option valuation would be even higher than the ones presented in the table.
Those involved in the lending process establish financing terms to protect the positions of all parties. The debt guarantee in Williams’ proposed financing, for example, provided insurance for the repayment of debt. Williams would essentially act as a co-signer for Williams Production RMT’s obligations to Berkshire Hathaway and Lehman Brothers. Per the terms, Williams would have to agree to make payments in place of Williams Production RMT if any of the payments were late or not paid.