Arundel Partners Case Study
Why This is an Attractive Project
The Arundel Partners' believe that they can make money on this project as it allows them to capitalize on the idiosyncratic risk of the motion picture business. Producing and distributing motion picture films is a risky business due to the uncertainty of moviegoers' tastes and a studio never knows if they have a blockbuster on their hands until after the movie has started production or even later after it has been released. The financial resources of even the largest studios often become strained. Arundel's value proposition, to purchase the rights to movie sequels in a sequence of payments during the producing of the first movie, is to provide funds to the movie studios when they most need it. Arundel benefits from this arrangement as the greatest risk is taken by the movie studios when they produce the original film. Almost all sequels follow successful films and in the last 10-20 years it has become common for successful films to spawn one or more sequels. Arundel will be able to determine the success of the first movie before they decide if they would like to make the sequel so there is a limited down side as they can always choose not to produce a sequel if the first movie performance is poor. In addition, Arundel also has the option to sell the sequel …show more content…
This was calculated using a discount rate of 12%. The PV of Net inflows were discounted back 4 years and the PV of Negative Costs were discounted back 3 years. The movie value of the positive NPV sequels ($490.87M for 26 movies) was then divided by the total 99 movies in the sample. Detail of our DCF calculation is provided in Exhibit 1. Assumptions and table for the Black-Scholes model can be viewed in Exhibit 2. Exhibit 3 provides a comparison of the two methods broken down by movie studio. The advantages and disadvantages of the two methods are detailed
The Arundel Partners' believe that they can make money on this project as it allows them to capitalize on the idiosyncratic risk of the motion picture business. Producing and distributing motion picture films is a risky business due to the uncertainty of moviegoers' tastes and a studio never knows if they have a blockbuster on their hands until after the movie has started production or even later after it has been released. The financial resources of even the largest studios often become strained. Arundel's value proposition, to purchase the rights to movie sequels in a sequence of payments during the producing of the first movie, is to provide funds to the movie studios when they most need it. Arundel benefits from this arrangement as the greatest risk is taken by the movie studios when they produce the original film. Almost all sequels follow successful films and in the last 10-20 years it has become common for successful films to spawn one or more sequels. Arundel will be able to determine the success of the first movie before they decide if they would like to make the sequel so there is a limited down side as they can always choose not to produce a sequel if the first movie performance is poor. In addition, Arundel also has the option to sell the sequel …show more content…
This was calculated using a discount rate of 12%. The PV of Net inflows were discounted back 4 years and the PV of Negative Costs were discounted back 3 years. The movie value of the positive NPV sequels ($490.87M for 26 movies) was then divided by the total 99 movies in the sample. Detail of our DCF calculation is provided in Exhibit 1. Assumptions and table for the Black-Scholes model can be viewed in Exhibit 2. Exhibit 3 provides a comparison of the two methods broken down by movie studio. The advantages and disadvantages of the two methods are detailed