A group of investors is contemplating the purchase of sequel rights for a selection of feature movies. They need to decide the amount to propose for the purchase and how to design a contract which involves one or more of the primary film studios in the US. The case uses cash flow approximations for all of the primary films which were launched in the US during the year 1989. The information is used to comeup with an approximated worth for the sequel rights before the film’s launch. The case is structured in a way to allow the students to understand the real options and ways of valuing them. It clearly demonstrates the significance of option pricing methods for some capital budgeting issues. Also demonstrates the pragmatic restrictions of such methods.
Discount Rate, Average PV of Inflows at Year 4, Average PV of Outflows at Year 3, Total No of Movies, Average NPV at Year 0, Maximum Payment per Sequel Rights
Why do the principals of Arundel Partners think they can make money buying movie sequel rights? Why do the partners want to buy a portfolio of rights in advance rather than negotiating film-by-film to buy them?
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, all of which require some part of the dataset in Exhibit 6-9. You may find it helpful to consult the Appendix, which explains how these figures were prepared.]
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?
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?