a) Why do the principals of Arundel Partners think they can make money buying movie sequel rights?
The principle point is that they want to buy the rights of movies that can become, if successful sequels. When successful they can choose to produce the movie by themselves or to sell to the highest bidder (other production companies). When the first movie is successful the initial investment for the right is easily covered by the potential benefit of the (potential) sequels.
As explained in the case, Arundel will notice the success or failure of a movie investment after the first few weeks of exhibition.
b) Why do the partners want to buy a portfolio of rights in advance rather than negotiating film-by-film to buy them?
Arundel want to buy a portfolio of right in advance ...view middle of the document...
Moreover by buying purchasing a broad portfolio of sequel rights, Arundel is increasing its probability of having a highly successful investment and therefore increase its potential benefit.
2) Estimate the per-film value of a portfolio of sequel rights such as Arundel proposes to buy. (There are several ways to approach this problem)
In order to estimate per-film value of the portfolio of sequel right as proposed in the case to Arundel, we calculated the Net Present Value for the Net income and the cost.
We discounted the Net income by 4 year at a rate of 12%. We discounted the cost by 3 years at a rate of 6% (see exhibit 7). Afterwards we deducted the costs from the Net Income.
These numbers were used to calculate the average of the Net Income and the costs.
As seen in the class we used call_bs macro to calculate the value the call option.
S= average of PV(Net Income) at year 0
K= average of the PV(Costs) at year 0
Sigma= the standard deviation of the one-year return
Risk free rate= 12%
This gave us a value of €5,71
3) What are the primary advantages and disadvantages of the approach you took to valuing rights? What further assistance or data would you require to refine your estimate of the rights’ value?
As written above we used NPV calculations. In our point of view this are the advantages:
* Easy to calculate with given data (and the excel-file provided in dropbox)
* The data that we used is empirical
* We based our calculation on hypothetical numbers of 1 year
* We assume that every succesfull movie leads to a sequel, this not always the case
4) What problems or disagreements would you expect Arundel and a major studio to encounter in the course of a relationship like that described in the case? What contractual terms and provisions should Arundel insist on?