Arundel Partners: the Sequel Project 2

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Executive Summary Arundel Partners: The Sequel Project
They would be interested in purchasing the sequel rights for one or more studiosˇ entire production over an extended period of not less than a year. If a particular film was a hit, and Arundel thought a sequel would be profitable, it would exercise its rights by producing the sequel. Alternatively, they can sell the rights to the highest bidder. Inevitably, the performance of the original films would not justify sequels, and for them the sequel rights would simply not be exercised. For most movies it becomes quite clear after their first few weeks in theaters whether a sequel would be economical or not, based upon each film's box office performance. Whatever, one reason for them to buy the rights to create sequels would be to find a possible arbitrage in between the price they would pay for an option to sequels and its real value. Therefore valuing option correctly is of the most importance. It is of critical importance to Arundel that a number of films and a price per film is agreed upon before either Arundel or the studio. We believe that portfolio negotiation rather than on a film-by-film basis will level the playing field. Because the Partners do not have background in the movie industry and those on the other side of the negotiating table do, it would be easier for the movie industry executive to figure out which movie would be a hit and which would be a miss and try to sell Arundel the rights to only those movies that will not be followed by a successful sequel.

To estimate the per-film value of a portfolio of sequel rights we used the event tree method. Therefore we applied Bayes’ theorem. First we calculated the probability of a successful movie, meaning a one-year return greater then zero. This amounts to 47,47%. Subsequently the probability of a successful hypothetical sequel, meaning a one-year return is greater then zero, is 28,28%. Then we estimated...
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