Arundel Partners: the Sequel Project

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Hint Sheet Arundel Partners: The Sequel Project This case is a vehicle for applying option pricing techniques to a corporate capital budgeting problem. In preparation for the case, students can refer to the HBS note “Exhibit 1: Option-Pricing Table” for background. Please address the following questions in your case writeup. • Why do the principals of Arundel Partners think they can make money buying movie sequel rights? Why do they want to buy a portfolio of rights in advance rather than negotiating film by film to buy the rights? • Estimate the per-film value of a portfolio of sequel rights such as Arundel proposes to buy. You will try two different methods to solve this problem: some appropriate DCF approach, and the Black-Scholes approach. You may find it helpful to consult the Appendix, which explains how these figures were prepared. (Suppose the appropriate discount rate for risky cash flows is 12%. Risk-free rate, for discounting safer cash flows, is at 6%.) • When you do valuation of sequel rights, pay particular attention to the issue of when uncertainty is resolved. Some part of the dataset in Exhibits 6 to 9 will be used in your analysis, but interpret the information therein with care. • 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 sequel rights' value? • What problems or disagreements would you expect Arundel and a major studio to encounter in the course of a relationship like that described in the case? What contractual terms and provisions should Arundel insist
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