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Unformatted text preview: 1. Provide a brief overview of the proposed venture. Clearly describe the relevant time line. The proposed business venture is to create an investment company named Arundel Partners that would invest in the movie business by purchasing the option to rights of potential movie sequels before the original movies are created. The option would be as follows: 1. Arundel would agree to pay a movie studio a certain contracted price for the rights to sequels of all films created in a certain period of time (one to two years) or a certain number of films (15 to 30) 2. Arundel would pay the studio cash advances into an escrow account for these movie options 3. The movie studio could then use these advances for the production of original films 4. If Arundel Partners thought that a sequel would be a profitable venture based on the release of the original movie, they could exercise their option to purchase the sequel rights at a pre-determined exercise price. Arundel would then either produce the sequel or sell the rights to another party. a. If Arundel produces and distributes the sequel, they would collect revenue from the movie (except for any revenues provided to the studio through the original option contract). b. If Arundel sells the rights, their profit would be the difference between the amount they received for the sequel rights and the exercise price Arundel paid for the rights. 5. If the original movie is unsuccessful, the option will likely be worthless and Arundel would not exercise their option for the sequel rights and the option would expire unexercised. 2. Why do the proponents of this venture believe that Arundel Partners can make money buying movie sequel rights? Why do they propose buying a portfolio of rights rather than negotiating the purchase price on a film-by-film basis? Why do they propose to purchase the sequel rights at t=0 (before the first film is released) rather than at t=1? Arundel should be able to make money buying options to movie sequel rights as a portfolio of rights rather than on a film-by-film basis because they are diversifying their risk by spreading their options across multiple projects rather than a single movie. By purchasing the options to a group of movies ahead of time, Arundel avoids trying to forecast how well the movie will do, minimizing the risk of moviegoer taste and movie performance. Arundel can then use the average past performance of movies as a basis to predict the average future performance. By spreading the cost of the option across multiple movies they are incorporating the zero-dollar values of the movies that would not be successful for a sequel, thereby reducing the overall per- movie amount they are paying....
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This note was uploaded on 03/07/2012 for the course FIN 6425 taught by Professor Nimalendran during the Summer '10 term at University of Florida.
- Summer '10
- Corporate Finance