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Arundel Case Analysis Questions

When you answer the questions below, please make the following assumptions:

Assumptions
i. The WACC is 12%
ii. In Table 7, the PV of Net Inflows are in time 4 dollars and the PV of the
Negative are in time 3 dollars.
iii. The risk-free rate is 6%

Questions
i. Why do the principals of Arundel Partners think that they can make money
buying movie
sequel rights? What is their strategic advantage?
ii. Why do the partners want to buy a portfolio of rights in advance rather
than negotiating
film-by-film to buy them?
iii. Based on the average film in 1989, if we use a simple NPV-approach, what
is the expected
NPV of owning a sequel? What is the problem with this approach?
iv. Estimate the per-film value of a portfolio of sequels rights such as Arundel
proposes to buy. Use the data about the 1989 films in Exhibits 6 and 7 to
construct the average payoff of successful sequels. Based on this, how much
Arundel should pay for each sequel in its portfolio?
v. When valuing the films in Exhibits 6 and 7, should all of the films be
included? How might
you systematically exclude films if you decide that some should not be
considered? How does this affect your answer to (iv) above?
vi. 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? In light of this, what contractual terms and provisions should Arundel
insist on?