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Transcript of Arundel
Why can we make Money?
Inability to properly value sequel rights
Willingness to give sell rights at a discounted price
The need for financing
Why purchase the sequel rights for ALL films before the initial movies are even produced?
To diversify away risk
To keep the fields leveled
To provide value to the studios when they need it the most.
Determining Film Value
Calculate NPV from hypothetical sequel cash flows and decide to accept reject studios portfolios
Per-film value: add positive NPV projects and divide the number by the total films made by the studio
If a project has a negative NPV, Arundel will choose not to pursue sequel production
Established sequel right price at $2.5 million
3 Best Performing Studios
Total Positive NPV: $310.05 Best Pricing Scenario:
Avg NPV per film: $ 4.84 Total Sum $160 million
Best Price per Film: $2.5 million
Last Straw Consulting
Total Positive NPV: $ 430.85 Best Pricing Scenario:
Avg NPV Per Film: $ 4.35 Total Sum $234.41
Best Price Per Film: $2.37
Avg NPV per Film: $3.35
Conflict in Incentives
>>Flop in the box office leads to studio gains a profit while Arundel has no opportunity for a profit
Conflict of incentives due to contracts made prior to production
>>Studio may produce cheap films to benefit from pre-determined price
>>Studio produces a film with a conclusive ending—impossible to develop a sequel
Solution: contract clause allowing Arundel to review the screenplays being considered and the right to request a plot revision or strike the films
Black-Scholes Pricing Model:
Valuing the Sequel Rights
S= the present value of cash inflows at t=0
E= the present value of the negative costs at t=0
e-rt= the future value of $1 for t periods at a compounded continuously rate R per period, R being the risk free rate
N(d2) and N(d1)= the probabilities that a standardized, normally distributed random variable is less than or equal to d1 or d2
Valuing the Sequel Rights
Estimated revenues and costs for 99 films released in 1989 by six major studios and hypothetical sequels
Historical data as an unreliable prediction for the future
Arundel partners should approach the major studios with an offer of $2.5 million per film.
Inquiries suggested studios would be tempted at $2 million
Arundel should expect to make $2,685,133 ($5,185,133-$2,500,000)