Submitted By- Antriksh Pandey, Roll- 1611305, PGP 2016-18

Arundel Partners: Questions

Note- Please find answers from next page. This page is as copied for case questions

Answer the following assignment questions:

1. Why do the principals of Arundel think they can make money by buying movie
sequel rights? Why do the partners want to buy the rights to a portfolio in advance
rather than negotiating film-by-film to buy them?
2. Estimate the per-film value of a portfolio of sequel rights such as Arundel proposes
to buy? [There are many ways to approach this problem but all of them require
some part of the data set in Exhibits 6-9. You may find it helpful to consult the
Appendix which explains how these figures were prepared.]
3. What are the primary advantages and disadvantages of the approach you took to
valuing the rights? What further assistance or data would you require to refine
your estimate of the rights value?
4. What problems or disagreements would you expect Arundel and a major studio to
encounter during a relationship like that described in the case. What contractual
terms and provisions should Arundel insist on?

These questions are intended to help your analysis. However, your final solution to the
case need not necessarily be limited to the answers to these questions or to the
assumptions made in the case.

Answers
Ans1. Arundel partners had one number in their mind, that is returns on yearly basis that
have ranged from a profit of 1224 % to -91 % loss. However what remains crucial is
selection of good script, actors and supporting crew, which in many films due to
subjectivity and market dynamics result in low profit. Thus to come to a objective
assessment of movie business, Arundel is looking to expand probability of success over
a period of time by purchasing sequel rights in advance for any movie .

At initial level Arundel has found that a successful movie would result in a
fairly successful sequel too. This proposition has to take subjective factors as discussed
above. So Arundel has to negotiate with studios for a simple and fair process. This can
only be possible if they avoid negotiating at per film basis with studios and rather they
will buy full sequel at a single offer price. This builds their case for purchasing portfolio
of rights. In this case they will invest in sequel only if the first movie is success otherwise
they will drop their plans for further investment. This idea is depended upon correct
estimation of net present value of rights at the contract date.

Ans2. For building a profitable business case , Arundel needs to arrive at a correct price
for whole rights portfolio. This can be achieved in two ways- i.) By using DCF
valuation through hypothetical sequel performance and discount rate based upon
opportunity cost, ii.) By using Black Scholes Option pricing model to calculate price
of rights portfolio.

Calculating value using DCF approach

We have used data from exhibits 6 to 9. Negative cost and Uss rentals are 70 percent and
120 percent respectively. We used Exhibit 7 to calculate PV at year 4 and negative costs
PV at year 3, from the hypothetical performance. Thus

NPV at year 0= PV of inflows at year 0- PV of negative cost at year 0

If NPV is not positive then sequel is discarded. Thus if movie is a success at year 1 then
we go ahead making a movie if NPV>o. Since the investment is made at year 3 we can
cross check NPV at year 3 also whether it is positive or not. As shown below we consider
only 26 positive NPV movie and discard 73 non positive ones

Thus Value per film =4.95

Calculating values using Black Scholes Model

We have used Black Scholes calculator to estimate value per film. This requires
application of - C= S*N(D1 )- E*e-rt*N(D2 )

Where S=PV of cash flows, E= PV of negative costs , e-rt = Future Value of 1 dollar
compounded at risk free rate R=6 percent
 PV of negative costs at t=0 16.08
PV of cash flows at t=0 13.72
Standard deviation 1.21

D1 0.52 using ln(S0/X) + T(R-Q+sigma2 )/sigma*T1/2

D2 -0.687 using D1-sigma*T1/2
N(D1 ) 0.6985
N(D2 ) 0.2483
Thus we see that call price is 5.06 per film by considering hypothetical revenues. Purchasing
anything below this price would be a profitable proposition

Assessment

Thus we see that using DCF approach and Black Scholes Model we get a price of 4.95 and
5.06 respectively which are quite similar. This validates the option pricing theory which is
based upon the assumptions of variables

Ans3. While using DCF approach we have to wait till movie goes into production which will
increase the bargaining power of studios as they will bid for a higher price in negotiation.
Moreover there are limitations of historical data available for a year, production companies
will agree to our terms and conditions, Success of films on per film basis is not taken rather we
have diversified our disks with portfolio approach.

However some advantages of this approach include its simplicity, a large sample
for analysis as all the movies are considered , historical data is used rather than assumed,
outliers are taken into consideration etc.

We will require more historical data, data about production companies about
their willingness to accept our case and rather a structured funding pattern wherein they have
given some detailed analysis of initial funding of project.

Ans 4. The possible disagreements are- Studios change in behaviour like not cooperating with
Arundel if films become hit as they will try to keep a larger share of profits with them, Making
different movies and pitching for higher share of revenues as films become successful.

Contractual terms and provisions should include clarifying on a accepted method

for rights payment preferably an escrow account, eliciting and retaining interest of studio in
films by sharing a acceptable amount of net profits/revenue or by giving studio a large share
of pie in later movies(second or third ), Exclusion of films where studio has a majority stake,
clarifying interest in sequel within a finite time (preferably 3 years ). Moreover Arundel can
grant studio distribution rights when movie involve a higher initial investment