Arundel

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Case 5: Arundel Partners
Prepare a memo addressing the following questions:
1. Explain why Arundel Partners is interested in purchasing the rights to make sequels of all of the studios movies, rather than just some. Why do they believe this venture is profitable?
2. Suppose that you are a movie executive. You are considering a movie version of the life of President Garfield in the months leading up to his assassination by Charles
Guiteau in a Washington DC railroad station in 1881. Your analysts have determined that the expected revenues are $94,556,250. They determine that revenues will be distributed binomially as shown in Exhibit 1 (40% annual volatility). Exhibit 1 shows the possible payoffs and the probability of each state occurring (note this information is provided in an Excel file). Assume that the one-year T-Bill rate is 5% (yield with semiannual compounding).
If given the green light, the movie will have the following costs:
a. $36MM – Negative Costs (assume it is incurred immediately)
b. $25MM – Distribution Fees (assume these are paid in one year)
c. $32MM – Distribution Expenses (assume these are paid in one year).
Should you accept this project? Why? Suppose that Arundel Partners will give you a
$2MM check for the rights to the sequel. Do you accept the project?
3. Suppose you come upon another project with exactly the same costs and possible payoffs. However, this film is a movie version of the popular 1960s television show
Gilligan’s Island. Would you give the green light to this movie without having sold the sequel rights to Arundel Partners? Why? What is its value?
Hint: You do not need to use the BS formula here, the distribution of cash-flows is binomial. You can compute the value of the sequel by considering its pay-offs at maturity, and then adjusting for time and uncertainty.
4. Suppose that the actual volatility of…...

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