Arundel Partners: The Sequel Project

Table of Contents Introduction 2 Question 1 2 Part 1 2 Part 2 3 Question 2 3 Method 1 – Using an Option Pricing Model 3 Method 2 – Using the Projected Financial Performances 5 Comparison 6 Question 3 7 Advantages 7 1. Time Value 7 2. Capture Value of Options 7 Disadvantages 7 1. Assumptions Made 7 2. Tax Effect 7 3. Historical Data 8 4. Selection Bias 8 Further Assistance/Data Required 8 Question 4 9 Problems/Disagreement 9 Contractual Terms and Provisions 9 Appendix A – Per Film Value Using Financial Projections 11

Introduction
In 1992, Paul Kagan Associates, Inc. came out with a new business idea. The idea was to create an investment group, Arundel Partners, to purchase the sequel rights associated with films produced by one or more major U.S. movie studios. As owner the rights, Arundel would wait to see if a movie was successful, and then decide whether or not to produce a second film based on the story or characters of the first.
One of the unique features of the new idea was that Arundel would purchase sequel rights before the first films were even made and released. Another feature was that the investor group would not make artistic judgements or attempt to select the rights for particular movies based on predictions of a possible sequel’s success. Lastly, Arundel’s advance cash payments for the rights, at an agreed-upon price per film, would help finance production of the initial films.
Whether Arundel could expect to make money depended heavily on how much it had to pay to purchase a portfolio of sequel rights. Hence, to ensure that the new business idea would be profitable, the company appointed Mr. David A. Davis, a movie industry analyst to value the sequel rights using the proprietary data on industry cash flows that the company has gathered.
Question 1
Part 1
Arundel Partners will be interested in buying movie sequel rights as it enables them to defer the investment without losing the