Description
Explains topics like NPV approach of arundel partners
Arundel partners: The Sequel project
Derivatives and Risk Management
It is given in the case that David Davis is required to make an analysis of the value of sequel rights on a pre-tax basis. Accordingly Davis has two alternatives to value each sequel 1. Using the normal NPV method 2. Using option pricing model to the parameters of distribution of sequel returns or sequel NPVs and thus estimate the value of the sequel Applying NPV approach we find from exhibit 7 that four studios namely Universal, Warner Brothers, Paramount pictures, and The Walt Disney company generate positive NPV. (Note here we calculate the NPV by discounting the cash Inflows to year 0 at 3% annual rate and the negative cash at 12% annual rate). The NPVs for various studios is shown below: Studio Name MCA Universal Paramount Pictures Sony Pictures Entertainment Twentieth Century Fox Warner Brothers The Walt Disney company NPV (in $ millions) 178.1 4.5 -149.7 -6.2 107.1 167.9
By investing in these four studios the total value of the sequel rights is $457.6 millions. The number of movies from these four studios comes to around 54. Hence the money made per 1989 first film would then be $8.47 millions. In the second approach we consider using the options pricing theory to evaluate our strategy. Here we calculate the option price for each studio. We take the volatility of returns for each studio as given in Exhibit 7, The risk free rate is taken as12% (same as the rate used for discounting outflows). The average PV of net inflows is taken as S0 and the average PV of negative outflow is the strike price (K). The option values for each of the studios is shown below Studio Name MCA Universal Paramount Pictures Sony Pictures Entertainment Twentieth Century Fox Warner Brothers The Walt Disney company Option Value (in $ millions) 46.39 28.15 61.43 31.72 148.09 74.74
When this option value is added to the NPV found in the above table we get the new NPV as follows
Studio Name MCA Universal Paramount Pictures Sony Pictures Entertainment Twentieth Century Fox Warner Brothers The Walt Disney company
NPV (in $ millions) 224.49 32.7 -88.2 25.5 255.2 242.6
Thus from the above table we see that by purely depending on NPV approach Davis may tend to neglect twentieth century fox which otherwise has good potential to add value to the deal.
doc_835640145.docx
Explains topics like NPV approach of arundel partners
Arundel partners: The Sequel project
Derivatives and Risk Management
It is given in the case that David Davis is required to make an analysis of the value of sequel rights on a pre-tax basis. Accordingly Davis has two alternatives to value each sequel 1. Using the normal NPV method 2. Using option pricing model to the parameters of distribution of sequel returns or sequel NPVs and thus estimate the value of the sequel Applying NPV approach we find from exhibit 7 that four studios namely Universal, Warner Brothers, Paramount pictures, and The Walt Disney company generate positive NPV. (Note here we calculate the NPV by discounting the cash Inflows to year 0 at 3% annual rate and the negative cash at 12% annual rate). The NPVs for various studios is shown below: Studio Name MCA Universal Paramount Pictures Sony Pictures Entertainment Twentieth Century Fox Warner Brothers The Walt Disney company NPV (in $ millions) 178.1 4.5 -149.7 -6.2 107.1 167.9
By investing in these four studios the total value of the sequel rights is $457.6 millions. The number of movies from these four studios comes to around 54. Hence the money made per 1989 first film would then be $8.47 millions. In the second approach we consider using the options pricing theory to evaluate our strategy. Here we calculate the option price for each studio. We take the volatility of returns for each studio as given in Exhibit 7, The risk free rate is taken as12% (same as the rate used for discounting outflows). The average PV of net inflows is taken as S0 and the average PV of negative outflow is the strike price (K). The option values for each of the studios is shown below Studio Name MCA Universal Paramount Pictures Sony Pictures Entertainment Twentieth Century Fox Warner Brothers The Walt Disney company Option Value (in $ millions) 46.39 28.15 61.43 31.72 148.09 74.74
When this option value is added to the NPV found in the above table we get the new NPV as follows
Studio Name MCA Universal Paramount Pictures Sony Pictures Entertainment Twentieth Century Fox Warner Brothers The Walt Disney company
NPV (in $ millions) 224.49 32.7 -88.2 25.5 255.2 242.6
Thus from the above table we see that by purely depending on NPV approach Davis may tend to neglect twentieth century fox which otherwise has good potential to add value to the deal.
doc_835640145.docx