Arundel Partners: The Sequel Project
Arundel Partners: The Sequel project
1. Why do the principals of Arundel Partners think they can make money buying movie sequel rights? Why do the partners want to buy a portfolio of rights in advance rather than negotiating movie-by-movie to buy them?
• The principals of Arundel Partners think they can make money buying movie sequel rights because they can use unpredictability of a movie’s success to their advantage. This can be done by exercising the right if the movie is a success or selling rights to another bidder in the event of the movie’s failure. By doing this, they limit the losses on bad sequels to the option price, and maximize the profits on winning movies. This works well since the majority of sequels are losers with …show more content…
Estimate the per-movie value of a portfolio of sequel rights such as Arundel proposes to buy. Use both a discounted cash flow (DCF) approach and an option valuation approach (such as Black-Scholes).
• Per movie value of a portfolio of sequel rights by:
o DCF approach = $4.88 M
We obtained $4.88M through the DCF approach (Exhibit 1) by a taking a summation of all positive NPV sequels and dividing it by the total number of sequel rights available i.e. 99.
Originally, by taking an average of all sequel rights available, we obtained a negative NPV value of $2.4M. Although this value gives us an estimate of the average project value, assigning equal weighting to successful movies as well as failures, does not seem plausible. Since there is significant volatility for the movie business, which DCF cannot account for, we attempted to incorporate it by following the method described above.
o Option Valuation Approach = $4.97M
This value was obtained by using Black-Scholes formula (Exhibit 2). Additionally, sensitivity analysis was performed (Exhibit 3) which determined that volatility is critical for pricing an option. We looked at three
1. Why do the principals of Arundel Partners think they can make money buying movie sequel rights? Why do the partners want to buy a portfolio of rights in advance rather than negotiating movie-by-movie to buy them?
• The principals of Arundel Partners think they can make money buying movie sequel rights because they can use unpredictability of a movie’s success to their advantage. This can be done by exercising the right if the movie is a success or selling rights to another bidder in the event of the movie’s failure. By doing this, they limit the losses on bad sequels to the option price, and maximize the profits on winning movies. This works well since the majority of sequels are losers with …show more content…
Estimate the per-movie value of a portfolio of sequel rights such as Arundel proposes to buy. Use both a discounted cash flow (DCF) approach and an option valuation approach (such as Black-Scholes).
• Per movie value of a portfolio of sequel rights by:
o DCF approach = $4.88 M
We obtained $4.88M through the DCF approach (Exhibit 1) by a taking a summation of all positive NPV sequels and dividing it by the total number of sequel rights available i.e. 99.
Originally, by taking an average of all sequel rights available, we obtained a negative NPV value of $2.4M. Although this value gives us an estimate of the average project value, assigning equal weighting to successful movies as well as failures, does not seem plausible. Since there is significant volatility for the movie business, which DCF cannot account for, we attempted to incorporate it by following the method described above.
o Option Valuation Approach = $4.97M
This value was obtained by using Black-Scholes formula (Exhibit 2). Additionally, sensitivity analysis was performed (Exhibit 3) which determined that volatility is critical for pricing an option. We looked at three