The Arundel Partners’ believe that they can do money on this undertaking as it allows them to capitalise on the idiosyncratic hazard of the gesture image concern. Producing and administering gesture image movies is a hazardous concern due to the uncertainness of moviegoers’ gustatory sensations and a studio ne’er knows if they have a blockbuster on their custodies until after the film has started production or even subsequently after it has been released. The fiscal resources of even the largest studios frequently become labored. Arundel’s value proposition. to buy the rights to film subsequences in a sequence of payments during the bring forthing of the first film. is to supply financess to the film studios when they most need it.
Arundel benefits from this agreement as the greatest hazard is taken by the film studios when they produce the original movie. Almost all subsequences follow successful movies and in the last 10-20 old ages it has become common for successful movies to engender one or more subsequences. Arundel will be able to find the success of the first film before they decide if they would wish to do the subsequence so there is a limited down side as they can ever take non to bring forth a subsequence if the first film public presentation is hapless. In add-on. Arundel besides has the option to sell the subsequence rights to the highest bidder if they do non desire to bring forth the subsequence themselves
Why Purchase Movie Rights in Advance
If Arundel Partners’ do non negociate the rights in progress they will happen themselves in a place which requires the consecutive declaration of uncertainness. consecutive dialogues of contracts. and a place where each unit of ammunition of dialogues carries the hazard of ending the relationship. The attack that helps Arundel take attention of these issues with the studios is that they negotiate the footings and conditions of purchasing the subsequence rights before even the first film is made. Additionally Arundel can take attention of the undermentioned issues:
Once the production starts the studio necessarily forms an sentiment about the film and Arundel would non desire to hold to dicker over single undertakings about which it knew less than the studio. This non merely undermines Arundel’s bargaining place but besides increases the dealing cost.
Since the upside potency from a successful subsequence is limitless ( with limited downside ) . Arundel can take maximal benefit of it merely by paying an mean monetary value across the subsequence rights. This is possible merely if studios have no sentiment formed about the film or its subsequences.
By acquiring into a trade with studios when their demand for fundss is the most can gain Arundel Partners non merely good trades but besides good will.
Premises of our DCF Analysis and Black-Scholes Model
Using the DCF method to the conjectural subsequence hard currency flows provided. we calculated a per-movie value of $ 4. 96M. This was calculated utilizing a price reduction rate of 12 % . The PV of Net influxs were discounted back 4 old ages and the PV of Negative Costs were discounted back 3 old ages. The film value of the positive NPV subsequences ( $ 490. 87M for 26 films ) was so divided by the entire 99 films in the sample. Detail of our DCF computation is provided in Exhibit 1. Premises and tabular array for the Black-Scholes theoretical account can be viewed in Exhibit 2. Exhibit 3 provides a comparing of the two methods broken down by film studio. The advantages and disadvantages of the two methods are detailed below.
Advantages/Disadvantage of the Two Models
Advantages of the DCF Model
Easy to understand. The DCF theoretical account requires few variables. which are easy to use and understand in the existent universe.
DCF indicates the intrinsic value of a undertaking instead than the pure comparing between different undertakings by utilizing the ratios like ROI.
DCF works good when measuring reciprocally sole undertakings.
Disadvantages of DCF theoretical account
The alterations in future hard currency flows will ensue in volatile end products.
Forecasting hard currency flows more than a few old ages into the hereafter is tough. crafting consequences into infinity. which is a necessary input. is even more hard.
The DCF analysis does non turn to the option value good in its basic theoretical account. Even when the option may play a critical function in the investing determination.
The DCF does non let for new information to be rapidly assimilated and capitalized upon.
Advantages of Option Value Model ( Binomial Tree/Black-Scholes )
By taking a short clip interval. one can closely come close the existent investing motions in the up-state and down-state. The Black-Scholes assumes the clip interval as minute. The necessary input here is the stock monetary value volatility. measured by the size of the up and down leaps.
The theoretical account does non depend on the expected return. which will be considered different by different people. Investors with different appraisals of the expected return will however hold on the call/put monetary value. In such. the investing determination is unified.
The investor’s hazard antipathy does non impact value. The Binomial tree/Black-Scholes can be used by anyone. regardless of willingness to bear hazard.
A negative NPV investing undertaking may be considered if it creates value through future opportunities/options.
Disadvantages of Option Value Model ( Binomial tree/Black-Scholes )
The Black-Scholes is merely applicable to valuing an European Option where the option can be excised on the excise day of the month merely
The binomial tree normally requires the appraisal of investing value in different periods. However. the long-run estimation is normally based on historical information. which works ill when foretelling future consequences.
Black-Scholes assumes that both risk free rate and discrepancy of the investing value are changeless. In the long tally. such variables may non be changeless.
Black-Scholes assumes that the investing value alterations are uninterrupted ; nevertheless. such an premise would be violated in the instance of critical unannounced issues.
Black-Scholes value. on norm. is excessively high for deep out-of-the money calls and excessively low for in-the-money calls. Such prejudices grow larger when option approaches termination.
Additional Data Required to Polish the Estimate of Value
The comparative cost and gross informations of the first movies and their subsequences on an single studio footing. If we have such informations. the Ïƒ in Black-Scholes could be more accurate for the movies produced by different studios.
The Arundel Partners’ cost of equity and debt-to-equity ratio. which could assist to place the price reduction rate used in the DCF theoretical account.
Extra historical informations on the public presentation of both “First Films” every bit good as existent “sequels” .
Expected Problems. Disagreements. and Contractual Commissariats
While the chances of Arundel traveling frontward seem advantageous. there are implicit in premises about timing and rights that would necessitate to be resolved as they could ensue in struggle between the two negociating parties: Arundel and the film studio. Once such inquiry has to make with the extent to which Arundel’s rights would widen. Selling and Merchandising rights are the up and coming sectors of gross coevals. While Arundel should take a firm stand on rights to all beginnings of future grosss. this would probably be a struggle point with the studios. The issue of future subsequence rights would besides necessitate to be resolved–in instances of films like Rocky. James Bond. and Batman. studios would probably be hesitating to give away rights to all subsequences when it is easy expected that multiple movies would follow. In these instances. a standard understanding where Arundel has decreasing rights as the figure of sequels additions makes sense. but the manner in which this agreement would be structured could be hard and confrontational.
The length of the term of understanding must besides be clearly defined. It is likely that Arundel would desire to lock in its pricing for a long period ; the studios nevertheless. would most likely want to restrict the clip committedness to see how good the agreement works. If Arundel is able to negociate multiple issue points. it should seek to make so. The timing of support and entree to the financess for the studio could potentially be a really combative state of affairs. We feel that Arundel should fund an escrow history at the clip production Begins but that all involvement earned prior to the terminal of production would belong to Arundel. Since the value of the movie is in the completion of the negative. that is the most attractive point in which financess are distributed to the studio. Along these same lines. for productions that are scrapped prior to completion. the financess should return back to Arundel along with a “cancellation” fee due to indecisiveness. Last. Arundel should guarantee that it has the option to offer out the production of subsequences to other studios–this will see competitory pricing through a command procedure and will non bind its custodies to any single studio.