Arundel Partners:

Why do the principals of Arundel Partners think they can make money buying movie sequel rights?
                      What value can they add to earn the money?

Why do the partners want to buy a portfolio of rights in advance rather than negotiating film-by-film to buy them?

Consider the following facts about the 26 filme (out of 99) whose hypothetical sequels have a positive NPV:
Average cash inflow (US theater rentals net of US distribution costs) at time 4 =  $57.2 million
Average cash outflow at time 3 (negative cost) = $24.5 million
Discount rate for investments of comparable risk = 12%
Based on this information, what is the value per sequel right at time 0?

Consider the following facts about the 99 hypothetical sequels
The average negative cost ("exercise proce") at time 3 of the 99 hypothetical sequels is $22.6 million
The average cash inflow of the 99 films ("the asset") at time 4 = 21..6 million.
           The current value of the aset is 22.6 million discounted at the risk adjusted free rate of 12&
The standard deviation of the asset price is 1.21 over the one year until the first film is released.
So NPVq = (21.6*/(1.12^4))/(22.6/(1.06^3)) = 0.72 < 1 so the option is "out of the money"
Cumilative standard deviation only cumulates for one year since that's when the uncertainty
that gets resolver at all gers resolved, so cumulative standard deviation = 1.21.
Black scholes table gives a factor that is closer to 35.5% than it is to 39.3%
A bigger table gives a value of  36.3%
Based on this information, what is the value per sequel right at time 0?

Since you'd actually be buying rights for some later year than the one the data are for, you'd
want to do sensitivity analysis for changes in the distribution of costs and revenues.
Which method would best support this?

What are some other pros and cons of the two methods?

What problems and disagreements would you expect Arundel and a mojor studio to encounter is the course of a relationship like that described in the case?\
What contractual terms and provisions should Arundel insist on>