The 10 year contract which Tom Hicks and his team proposed for Alex Rodriguez was one of the biggest ever in the history of Baseball. It was a major Investment decision for the group. The Group had taken over the Dallas Stars few years earlier and spent on buying quality players. This worked wonders for the team and Dallas Stars went on to lead the group. Tom Hicks had a policy of spending 50-55% of team revenue on team payrolls. If that is maintained he always gains an operating profit of 10-15%.
Texas Rangers can bring more revenue to the group if they reach the American Championship Series and By reaching the seventh game of the World Series could add over $20 million in incremental revenue. The Rodriguez factor was believed to be the pushing factor behind this strategy of the group. There are also other factors such as Sponsorship deals, fan attendance, merchandise sales which contribute to the yearly revenues of a team. So, I am analyzing it based on those lines.
1. Texas Rangers reach 2001 American Champion Series and also the seventh game of the World Series bringing in more revenues for the Southwest Sports Group
2. Texas Rangers fail to reach both 2001 American Champion Series and also the seventh game stages of the World Series.
3. Texas Rangers reach either one of them in 2001 with the help of Alex Rodriguez.
(From Exhibit 5)
Texas Rangers expenditure on Alex Rodriguez in 2001: $21 Million (contract amount) + $2M (Yearly signing bonus) + the present value of the deferred compensated amount with a 3% annual interest ($5M) + insurance premium (10% of the yearly contract value) in case of any career threatening injury to Rodriguez
Present Value of the Deferred Compensated amount: 5 Million/ (1+0.03)10 = $3720514=3.72Million
Total Expense: 21+2+3.72+10 %( 26.72) =29.4Million Dollars.
Immediate Benefits for Texas Rangers in 2001:
1. Present Value...