Compass Records Case Study Solution

Professor Thomas Piper prepared the original version of this note, “Assessing a Firm’s Future Financial Health,” HBS No. 201-077, which is being

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (Eds.). (2011). Essentials of corporate finance (7th ed., Rev.). New York, NY: McGraw-Hill Irwin.

CitedBrigham, Eugene F. , and Phillip R. Daves. Intermediate Financial Management. 8th ed. Mason: Thomson South-Western, 2004.

We use Capital Asset Pricing Model (CAPM) approach to calculate the cost of equity. The formula of CAPM is re = rf + β × (E[RMkt] – rf).

3. How should the acquisition of MPIS be financed, taking into account the issues of control, flexibility, income and risk?

This solutions manual provides the answers to all the review questions and end-of-chapter problems in Financial Management: Principles and Practice, by Timothy Gallagher. The answers and the steps taken to obtain the answers are shown. Readers are reminded that in finance there is often more than one answer to a question or to a problem, depending on one‘s viewpoint and assumptions. One answer is

For new bands, one of their first major steps into getting into the business is usually finding a record label. A record label is commonly known by most people as someone who simply signs a band and sells their music. What most people do not know is that they do much more than that. A label does do all the things that people believe they do, however, they also do much more to help an artist. A label is one band’s contact to other artists or promotors that will help further their popularity and reach out to more businesses who could potentially seek endorsement deals to support an artist while also advertising their own product (Lindvall). However, some bands have had negative experiences with labels. There are many negative outlooks on record labels recently and their work with certain artists.

Week 1 – Introduction – Financial Accounting (Review) Week 2 – Financial Markets and Net Present Value Week 3 – Present Value Concepts Week 4 – Bond Valuation and Term Structure Theory Week 5 – Valuation of Stocks Week 6 – Risk and Return – Problem Set #1 Due Week 7* – Midterm (Tuesday*) Week 8 - Portfolio Theory Week 9 – Capital Asset Pricing Model Week 10 – Arbitrage Pricing Theory Week 11 – Operation and Efficiency of Capital Markets Week 12 – Course Review – Problem Set #2 Due

Two main risks need to be considered with this acquisition. The first risk is the contingent liabilities arising from Elson’s compensation and accumulated earnings from PTI’s interest-earning assets. Lane should provide the bank information on the accountant’s opinion on these contingent liabilities as rationale the bank’s valuation needs to discount them from their asking price.

Over the past fifty years, the British Music Publishing industry has undergone dramatic changes. It has evolved as an entity with innovations in technology, changes and creations of laws and new mediums to promote and exploit songs to a wider audience. Therefore, the way in which the music publishing industry operates and exploits its assets has completely transformed, and continues to do so at a rapid pace. This paper will attempt to explore the ways in which publishers exploit song copyrights and the way in which this has changed over the past 60 years. It is important to define what is meant by copyright and its role within the industry. The Performing Right Society website states: “Copyright

‘Independent record labels have been around since music started being recorded’ (King, 2012, p.13). Created by fanatics with a passion for music, the recording and production process was often self-funded and the purpose was to nurture talent and creativity. Most of the major record companies we know today would have once started in this manner (King, 2012).

The cofounders of Compass Records, a small, independent music recording company, must decide whether to produce and own the next album of an up-and-coming folk musician, or simply license her finished recording. The case presents information sufficient to build cash flow forecasts for either investment alternative. The task for the students is to build a valuation model for the two capital investment alternatives, whereby they can evaluate the attractiveness of the investment based on net present value (NPV) and the internal rate of return (IRR) of the discounted cash flows (DCF). Further, the student will have the opportunity to interpret those results and to test those measures’

This document is authorized for use only by Yen Ting Chen in FInancial Markets and Institutions taught by Nawal Ahmed Boston University from September 2014 to December 2014.

Baker, M. & Wurgler, J. 2002, ‘Market Timing and Capital Structure,’ Journal of Finance, vol. 57, pp 1-32

Parrino, R., Kidwell, D.S., & Bates, T. W. (2012). Fundamentals of Corporate Finance (2nd ed).