Arundel Case Essay

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Arundel Partners: The Sequel Project Case study Outline Executive Summary … 2 Summary of Facts … 3 Statement of Problem … 3 Investment analysis … 4 Valuation methods: Discounted Cash Flow (supported by Annex 1) … 5 Decision Tree (supported by Annex 2) … 6 Real options (supported by Annex 3) … 7 Contract provisions … 7 Recommendations … 8 Executive summary The main problems arising in Arundel Partners’ investment decision in a portfolio of sequel rights is how to value these rights in order to determine whether such investment makes sense, how much they should pay for these rights and the contractual provisions that should be agreed upon with the studios in order to align the incentives of both parties. By analyzing all the information available, we can argue that there is great potential for value generation for Arundel, as the studios are willing to accept low prices for the sequel rights, due to the fact that, in general, these rights were not sold in that period and they were not even taken into consideration when the first movie was produced. From Arundel’s perspective, the sequel rights can be considered, on average, undervalued securities. When using the Discounted Cash Flow approach and the decision tree method, we have discovered that two of the six studios considered for collaboration – namely, MCA Universal and The Walt Disney Company – have sequel rights that generate a positive net present value. Since we consider that the real options approach best mimics the reality of this case, we also employ this method on a studio portfolio basis, and discover that besides the two studios mentioned above, Warner Brothers’ sequel rights also seem to be underpriced. In this setting, we recommend that Arundel Partners pay a maximum of US$5.55 million for MCA

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