Arundel Case Solution
Arundel Partners
Edgefield Consulting
09/25/98
As a new business opportunity arises, so do some of the uncertainties that come along with it. Our company has been brought in to evaluate some of these uncertainties that come along when unchartered territory is explored. Arundel Partners has an idea that has great potential, but there are a few problems that must be addressed in order for the idea to become reality. First, we will look at potential limited partners. More than likely general partners will not have experience or specialized knowledge in the movie industry. They do not currently see the value in sequel rights, how they will be able to make money off of these investments in the rights, or understand why studios would be willing to sell them. Then, we will address the timing of the offers and why it is so important, especially in this case. Next, we will look at the “fair” value for these films using two different approaches. The first approach is the net present value of the entire set of 99 films for 1990. We will look at three different sets of assumptions with the net present value approach. The second approach is option pricing using five factors: stock price, strike price, time to maturity, risk-free rate, and standard deviation of the return of the stock. Both of these approaches allow the right, but not the obligation, to acquire an asset by paying a predetermined amount on or before a certain date or time period. The last issues we will address are some of the largest issues dealing with conflict in incentives. These conflicts pose the largest problems in the potential for Arundel Partners. The uncertainties that come along with new business opportunities have certainly followed the potential idea for Arundel Partners.
The general partners believe they can add value or make money from buying sequel rights to films for a few reasons. When examining the proposed business idea that would fundamentally create Arundel Partners, it is
Edgefield Consulting
09/25/98
As a new business opportunity arises, so do some of the uncertainties that come along with it. Our company has been brought in to evaluate some of these uncertainties that come along when unchartered territory is explored. Arundel Partners has an idea that has great potential, but there are a few problems that must be addressed in order for the idea to become reality. First, we will look at potential limited partners. More than likely general partners will not have experience or specialized knowledge in the movie industry. They do not currently see the value in sequel rights, how they will be able to make money off of these investments in the rights, or understand why studios would be willing to sell them. Then, we will address the timing of the offers and why it is so important, especially in this case. Next, we will look at the “fair” value for these films using two different approaches. The first approach is the net present value of the entire set of 99 films for 1990. We will look at three different sets of assumptions with the net present value approach. The second approach is option pricing using five factors: stock price, strike price, time to maturity, risk-free rate, and standard deviation of the return of the stock. Both of these approaches allow the right, but not the obligation, to acquire an asset by paying a predetermined amount on or before a certain date or time period. The last issues we will address are some of the largest issues dealing with conflict in incentives. These conflicts pose the largest problems in the potential for Arundel Partners. The uncertainties that come along with new business opportunities have certainly followed the potential idea for Arundel Partners.
The general partners believe they can add value or make money from buying sequel rights to films for a few reasons. When examining the proposed business idea that would fundamentally create Arundel Partners, it is