A Group of Investors

Executive Summary A group of investors (Arundel group) is looking into the idea of purchasing the mishap rights associated with films produced by one or to a greater extent major movie studios. Movie rights are to be corruptd prior to films being made. Arundel wants to come up with a decision to either purchase all the sequel rights for a studios entire takings during a specified period of time or purchase a specified number of major films. Arundels profitability is parasitical upon the price it pays for a portfolio of sequel rights. Our analysis of Arundels proposal includes a pelf present value calculation of each movie production company.In order to break up whether Arundel can make money buying movie sequel rights depends on whether the net present value of the production companys movies is higher than the estimated 2M per film required to purchase the rights. 1. Why do the principals of Arundel Partners think they can make money buying movie sequel rights? 2. Why do the pa rtners want to buy a portfolio of rights in advance rather than negotiating film-by-film to buy them? 3. Estimate the per-film value of a portfolio of sequel rights such as Arundel proposes to buy. You may use all or parts of Exhibits 6 to 9.You may also find it helpful to consult the Appendix that explains how these numbers were prepared. Assume an annual discount rate of 12% for risky film coin flows, and a risk-free rate of 6%. a) First, simply compute the value of the portfolio (i. e. at the time Arundel pays for the rights) using the traditional NPV approach, ignoring embedded options. Based on this method, how more than should Arundel be willing to pay per sequel right? As can be seen in exhibit to solution 2, we have estimated the per-film value of each production company.MCA Universal, Warner Brothers and Walt Disney Co are the only production companies that provide a positive per film value, with values of 9. 89, 1. 92, 12. 56 one million million million respectively. Th is value is calculated by dividing the net present value of all the movies by the total number of movies. We also calculated the average value of each production company based upon their fortune of the total number of movies produced. The companies with positive values were MCA Universal, Warner Brothers and Walt Disney Co is also the only production companies that provide a positive per film value, with values of 1. 0, 0. 37, 1. 40 million respectively. These values are based on the average value per film multiplied by the company average share of the industry. b) Second, modify the NPV approach to bank bill for the embedded option(s), explaining the nature of the option(s) you focus on. What is the implied value per right? 4. What problems or disagreements would you expect Arundel and a major studio to encounter in the course of a family relationship like that described in the case? What contractual terms and provisions should Arundel insist on?