This website uses cookies to ensure you have the best experience. Learn more

Arundel : Options Case Essay

1681 words - 7 pages

Arundel Partners – The Sequels Project

After evaluation of the proposed acquisition of the movie sequel rights, we recommend to offer movie studios as a per-movie price to purchase the sequel rights for their entire portfolio of movies the studios are going to produce over the next year. 

Arundel should make an offer to buy sequel rights as the average NPV (on a per film basis ) is $5.51 mn (this is the value calculated using real options method).
Hence, we should pay a price below $5.51mn. As per informal inquiries made by us, the studios would be tempted to accept the price of $2mn or more and would not even consider a price below $1mn.

We propose that we should negotiate for ...view middle of the document...

The results are as below

Studio | Average value of sequel rights per film( in $mn) |
All Studios | 8.61 |

Drawbacks and improvements of the DCF analysis method

DCF models underestimate the value of investments where there are embedded options to follow up with a second investment if the first one does well (follow-on option)

1. Discount rate: The analysis assumes that the discount rate is the same for the complete throughput time of the project. This can be countered by using different discount rates for different years, in case required.
2. Static model: Once the decision to go for the project has been made, possible future changes are not taken into account anymore. It does not account for future decisions (such as hold or abandon a part of the project) based on better information or change in scenario. The NPV of the project should be split in multiple projects whereby the decision is postponed until more information is known about a particular part of the project
Valuation of Sequel rights using Real Options model
Reason to use options model

The valuation of sequel rights involves contingency. This makes options model a better tool for this analysis since it is dynamic. Using the options method firstly provides us the flexibility to defer, contract, expand or abandon an investment. With an options model, Arundel Partners gets a right but not an obligation to produce the sequel. This is based on the success of the first film.

Secondly the options model helps us get a gauge of the probability of the first film (if we use the returns of first film in the option price) before taking a decision on the sequel. We are given how the sequel is expected to perform based on cash flows of previous sequels. From here we can get the expected net payoff of the sequel. However, if we used the DCF model, we would have to settle down with this net payoff as the value of the sequel. In contrast, the options model gives us the opportunity to calculate a “probability of success” of the first film, and multiply this probability with the net payoff of the sequel. Thus, options model is bound to give us a more accurate value of the sequel.

Black Scholes Model

It makes more sense for Arundel Partners to buy a European call option on the sequel than an American call option. This is because Arundel Partners can invest in a sequel only in Year 3, while the success factor of the first film will be known by the end of Year 1. Therefore, there is no advantage for exercising an option to make a sequel earlier than Year 1.
In theory, Valuation of Sequel Rights = probability that first film is a hit * net payoff of sequel
Probability that first film is a hit = European call option price
The parameters of this European call option on sequel rights...

Other Papers Like Arundel : Options Case

Freedom And Responsibility Essay

2141 words - 9 pages amendment is “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercises thereof” (Jordan, 1999). Therefore, the first amendment states citizens have freedom of religion and exercises of the religion. The article entitled “Lawsuit alleges FBI violated Muslims’ freedom of religion,” published by Jerry Markon, Washington Post Staff Writer, justifies the detailed case of the FBI surveillance targeting Muslims for

Hate Crime Laws Essay

2348 words - 10 pages Death of James Byrd”). While this particular case may give the appearance that perpetrators of hate crimes receive appropriate punishment, almost a decade later, one particular case demonstrates the inequity in the application of hate crime punishments: In 2007, Sean Kennedy of Charleston, South Carolina, left a bar around 3:45 am and was confronted by Stephen Moller, who called him a “faggot” and then punched him so hard in the face that his

Rational Emotional Behavior Therapy Case Study Conceptualization And Treatment Plan

2140 words - 9 pages Rational Emotional Behavior Therapy Case Study of Sarah: A Conceptualization and Treatment Plan Rational emotive behavior therapy, REBT, was developed by Albert Ellis and holds the central belief that the events in our lives do not cause our disturbances but that they are instead caused by our view of the events (Murdock, 2009). Murdock (2009) states that “people are seen as responsible for their behavior” (p. 279) but, because they are

Holidays In Albania

1636 words - 7 pages Have you ever thought about having exciting and incredibly cheap vacations? Albania might be the right choice. According to My Travel Guide, Albania is ranked the fourth among ten places worth visiting in Eastern Europe (“Top 10 Eastern European Destinations”). One can encounter three kinds of vacations in this Mediterranean country: winter, summer, and cultural. The ideal places to spend your winter vacations are the Albanian Alps. They are

A Heart Of Darkness

1748 words - 7 pages In this short story, there are frequent significant subject and ideas that make the story, "A Heart of Darkness," by Joseph Conrad, and haunting novel. The main theme is absolute white power over the natives. The theme validates the corruption, and the dependence caused by the white people as they took over the Congo. White men were giving all the power; they had no self-control, and in the end they did not use wisely. The white men became

The Aspects Of Vulnerability Among The Exploited In Medical Research

2287 words - 10 pages proceeding examples. The Willowbrook Hepatitis Studies was a case in which individual rights were severed and respect for one’s autonomy was lost. In 1947, in Staten Island, NY, Willowbrook was opened. Willowbrook State School was a state-funded institution for developmentally disabled children intended to accommodate approximately 4,000. By 1965, that number reached a population high of about 6,000. This high population mixed with a short staff led

The Hitchhiker’S Guide To The Galaxy

1171 words - 5 pages The Hitchhiker’s Guide to the Galaxy As the human race makes life-changing discoveries, it is made apparent that there is always more to learn as the universe, instead of becoming familiar, is becoming absurd. The Hitchhiker’s Guide to the Galaxy, written by Douglas Adams, as well as the 2005 film adaption, portrays absurdity to be an all-encompassing system in the universe. Through the introduction and attempt to understand lack of reason, the

The Ford Motor Company Wage Increase Of 1914 And The Theory Of Incentives And Efficiency Wages

1252 words - 6 pages doubling these wages can only be justified if, in some other way, it generates an equal or superior amount of value (either through a better product, lower costs, or both). According to the theory of incentives and efficiency wages, this is indeed the case, and Henry Ford even asserted that this decision was one of the best-cost cutting judgements they ever made (Raff and Summers 1987). This paper will outline the history of Ford Motor’s 1914

Historical Analysis Of The Economical Breakthroughs Of The Industrial Revolution

1396 words - 6 pages revolution, capitalism was used as the dominant form of economy in England. This helped England’s economy become consistent and organized throughout the country. However, it also posed certain, significant, problems. In order for the perfect capitalism to be achieved, every citizen had to begin equal. This was not the case, as many descendants of nobility and very early entrepreneurs started England's switch to capitalism with a lot more money than most

Leadership Portrayed in Monologue from Shakespeare’s Henry V

1214 words - 5 pages for their family and their country’s reputation. (Jacqueline and Milton, 2012)In real life case, a successful leader usually has good communication skill when talk to followers, people cannot influence their team members without connect communication to them. Language is a most powerful tool used by leader to manage and influence people in different industries. (Seargeant, 2009) Henry’s speech with unlimited energy and confidence, he cheers up

Cuba Civil Rights

1906 words - 8 pages Oct 2013. "World Report 2013 Cuba."Human Rights Watch.Human Rights Watch, 2013.Web. 14 Oct 2013. Wylie, Lana. "The Special Case of Cuba."International Journal 67.3 (2012): 661-84. ProQuest.Web. 9 Oct. 2013. "2012 Human Rights Reports: Cuba." U.S Department of State Diplomacy in Action.Bureau of Public Affairs, 19 04 2013.Web. 14 Oct 2013.

Related Essays

Arundel : Options Case Essay

1313 words - 6 pages Critical Research Paper “The Mocking of Crist” by Edouard Manet Natallia Kolas Oakton Community College (DP Campus) HUM 123 (6:30 class) 09/27/2011 Even before going to the Art Institute, I knew that I wanted to write about one of Manet’s paintings. I admire his passion to create beautiful art even if it meant going against “old school” standards and principles. “The Mocking of Crist ” really caught my eye because of artist’s

Arundal Paper

1375 words - 6 pages per-film. Further considerations for Real Options Valuation approach Real options valuations recognise that the partners at Arundel obtain valuable information after the sequel rights have been purchased and the first films are released in the theatres. This additional information allows the partners to make informed actions in response, based on dynamic decision making. This approach allows for valuing real assets with some degree of

Arundel Partners Essay

3655 words - 15 pages the loss is limited, and Arundel Partners have a high possibility of making money by owning the portfolio. The value creation primarily comes from the right to get potential profit of successful sequel films. By buying a portfolio of sequel rights to all films in advance, Arundel Partners can avoid diminishing uncertainty of sequel films, and thus keep options valuable and buy sequel rights at a 3 / 11 Arundel Partners: The Sequel Project

The Fall Of King Charles I Of England

2702 words - 11 pages influence on the king.18 Some historians even called her “an ignorant political meddler” who helped cause the civil war.19 Whether she helped start the war or not would be difficult to prove, but she did cause the king’s subjects to lose their trust in the king. People were beginning to think there was a papal plot going on. And it didn’t help when the earl of Arundel was seen travelling to a council meeting with the papal coat of arms.20 People