Option and Major Studios

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FIN 4414 – Financial Management – Spring 2009

“Arundel” Case Assignment

Due: March 23, 2009

Case: “Arundel Partners: The Sequel Project,” HBS, Case # 9-292-140, Revised 12/92.

Main Question: Is $2million per movie a fair price? Why or why not?

Additional Questions

1. Provide a brief overview of the proposed venture. Clearly describe the relevant time line.

2. Why do the proponents of this venture believe that Arundel Partners can make money buying movie sequel rights? Why do they propose buying a portfolio of rights rather than negotiating the purchase price on a film-by-film basis? Why do they propose to purchase the sequel rights at t=0 (before the first film is released) rather than at t=1?

3. Assuming a discount rate of 12% (risk free rate of 6% and a risk premium of 6%) calculate the NPV for all the sequels. Use the expected negative costs and the expected revenues given in Table 7.

4. Using the “decision-tree” approach, calculate the per-movie value of the sequel rights to the entire portfolio of 99 movies released in 1989 by the six major studios.

5. Assume that a maximum of ten sequels can be made in any given year. 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?

6. Using the Black-Scholes approach, calculate the per-movie value of the sequel rights to the entire portfolio of 99 movies released in 1989 by the six major studios. (Assume once again that there is no maximum to the number of sequels that can be made in a given year). You must provide details of how you estimated the inputs to the B-S formula. a. Asset value

b. Exercise price
c. Volatility of asset returns
d. Time to maturity
e. Risk-free rate

HINT: Note that the time to maturity of the options is when uncertainty is resolved not necessarily when the...
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