EF5052 Investments Case 3: Arundel partners, The Sequel Projet

EF5052 INVESTMENTS
CASE 3

Arundel Partners: The Sequel

Project

!"#P $ :

Ngai Chiu Wing Edward / 51042814

Ng Cheuk Yiu Hugo / 50649257
Lau Chau Nan, Ee!"n / 9700 4##0
$uo, Con%&an&ino / 5106 4265
'ang Hhong Yu, (ran)e%)a / 50191000
Ng $a &o, *rin / 9747 5858
+uen Hung $i&, 'hi!i / 5114 4#21
$uok, $enne&h / 5101 2428

'age 1 o- 7
 EF5052 Investments Case 3: Arundel partners, The Sequel Projet

%h& do the 'r(nc('als o) Arundel Partners th(n* the& can +a*e +one& ,u&(n-
+o.(e sequel r(-hts/ %h& do the& ant to ,u& a 'ort)ol(o o) r(-hts (n ad.ance
rather than ne-ot(at(n- )(l+ ,& )(l+ to ,u& the r(-hts/

.aking one" in &he oie indu%&r" i% an unredi)&a!e &a%k Wea&her a -i!

wi!! e a))e&ed " &he genera! u!i) deend% on an" -a)&or% whi)h are di--i)u!& &o
uan&i-" *% &he %&or" aea!ing3 Wi!! "ou -ind good a)&or% in &he )a%&ing3 Wi!! &he"
under%&and ea)h o&her we!! wi&h dire)&or3 Wi!! arke&ing )a&)h &he u!i)% a&&en&ion3
he%e are u%& %oe o- &he ue%&ion% whi)h are un)er&ain u &i!! adan)e %&age% o- &he
-i! rodu)&ion +o a%i)a!!", &he earning% o- a %&udio or a )oan" in &he oie
indu%&r" wi!! !arge!" deend on i&% ai!i&" &o )hoo%e good %)ri&% and -ind &he righ&
)rew &o haronie &he roe)& he re&urn% in one "ear )an ar" wide!" -ro -i!%
giing a 1224 ro-i& &o 91 !o%%e%
:iou%!", &he oie u%ine%% i% a er" un%&a!e one and wha& &he ;runde! ar&ner%
were !ooking -or wa% &o %&ai!ie or a& !ea%& !ook -or %&a!e )hara)&eri%&i)% o- &hi%
indu%&r", whi)h )ou!d e ea%ured wi&h ore a))ura)", and u%e i& &o o&ain %oe
ro-i&% *- &he" )ou!dn& hae an" hin& o- a -i! wou!d e a hi& or no&, a& !ea%& &he"
)ou!d -ind %oe redi)&ion% on how &he %eue!% o- oie% wou!d do he -a)& &ha&
a!o%& a!! &he %eue!% -o!!ow a %u))e%%-u! -i! gae &he ;runde! ar&ner% a good oin&
&o %&ar& wi&h he" )ou!d u%e in-ora&ion -ro &he -ir%& -i!% &o ake re%u!&% e%&ia&e%
and )a!)u!a&e i- &he roe)& wa% wor&h" or no& he" roo%ed an innoa&ie idea in
whi)h &he" wou!d u" &he righ&% o- aking &he%e %eue!% !ong &ie e-ore and een
e-ore &he -ir%& -i!% were %&ar&ed he" &hough &hi% idea wou!d e grea&!" a))e&ed a%
i& wou!d our )a%h in &he roe)& when i& wa% needed &he o%& a& ear!" %&age% o- &he
oie Howeer, in order &o e!iina&e &he er" %ue)&ie -a)&% e<!ained ear!ier, and
%in)e &he %&udio% wou!d een&ua!!" know ore aou& &he oie e<e)&a&ion% &han &he
'ar&ner%, &he" had &o nego&ia&e &he &er% in a -air and neu&ra! )ondi&ion ha& i% wh"
&he" wan&ed &o aoid nego&ia&ing a ri)e er -i!= in%&ead &he" wou!d o--er a %ing!e
ri)e -or &he who!e %eue! righ&% o- a %&udio during an e%&a!i%hed eriod o- &ie *-
&he -ir%& oie wa% a %u))e%% &he" wou!d e<er)i%e &heir righ& and ake &he %eue! or
%e!! i& &o &he highe%& idder :&herwi%e &he" wou!d u%& wri&e i& o-- &heir ine%&en&
%)hedu!e he )han)e% o- aking a ro-i&a!e u%ine%% wou!d !arge!" deend on a
good e%&ia&e o- &he righ&% re%en& a!ue a& &he )on&ra)& da&e o !e%% wou!d no& &e&
&he %&udio% >inuirie% indi)a&ed no& !e%% &han ?+@ 2 i!!ion er oieA and &oo u)h
wou!d no& ake &he u%ine%% ro-i&a!e

'age 2 o- 7
 EF5052 Investments Case 3: Arundel partners, The Sequel Projet

Est(+ate the 'er1)(l+ .alue o) a 'ort)ol(o o) sequel r(-hts such as Arundel

'ro'oses to ,u& ou (ll tr& to d())erent +ethods to sol.e th(s 'ro,le+: so+e
a''ro'r(ate 4CF a''roach and the 6lac*1Scholes a''roach ou +a& )(nd (t
hel')ul to consult the A''end(7 h(ch e7'la(ns ho these )(-ures ere 're'ared
8Su''ose the a''ro'r(ate d(scount rate )or r(s*& cash )los (s 92 !(s*1)ree
rate )or d(scount(n- sa)er cash )los (s at ;<

he )en&ra! %&one o- ;runde! ar&ner% roe)& i% &o e%&a!i%h a )orre)& ri)e -or
&he who!e righ&% or&-o!io o do &hi% &wo e&hod% are re%en&edB aA )a!)u!a&ing &he
h"o&he&i)a! %eue! er-oran)e% and o&aining a &o&a! a!ue o- ine%&en& u%ing an
aroria&e ra&e -or di%)oun&ing &o re%en& &ie A u%ing a %i!e !a)k+)ho!e%
o&ion% ri)ing ode! &o )a!)u!a&e &he ri)e o- &he righ&% )a!!
he da&a whi)h we wi!! u%e &o )ou&e our )a!)u!a&ion% wa% roided " @aid @ai%
and &he 'au! $agan ;%%o)ia&e% whi)h are re%en&ed in e<hii&% 6 &o 9

Ca!)u!a&ing &he N'D o- a!! &he ro-i&a!e %eue!% o- a %&udio

he da&a u%ed a%%ue% &ha& &he %eue!% e%&ia&ed nega&ie )o%& and ?+ &hea&er ren&a!%
are 120 and 70 re%e)&ie!", o- &he )orre%onding i&e% -or &he -ir%& -i! :n
e<hii& 7 we -ind &he re%en& a!ue a& "ear 4 and &he 'D o- &he nega&ie )o%& a& "ear #
-ro &he h"o&he&i)a! %eue!% +in)e &he righ& o- a -i! gie u% &he oor&uni&" &o
de)ide wea&her ine%&ing in&o &he %eue! i% ro-i&a!e, &he de)i%ion i% ade on Year #
*- a& &ha& &ie &he -ir%& -i! had no ig %u))e%%, &he %eue! wou!d e iedia&e!"
di%)arded, &hu% no ine%&en& wou!d e ade and &he )han)e% o- !o%% wou!d e nu!!
he -o!!owing drawing re%en&% &he o&ion on &he %eue! o- a -i!B

.ake &he N'D0

%eue!
.oie a
+u))e%% 3
N" .ake &he N'DF0
%eue!

u" righ& &o

oie
%eue!3

N"

EA! 0 EA!3 EA!=

+in)e &he o%i&ie ran)h o- &he &ree wou!d e &he on!" a&h rea!!" -o!!owed, we wi!!
on!" &ake in&o a))oun& &ho%e -i!% whi)h hae a o%i&ie N'D (ro &he h"o&he&i)a!
%eue! da&a we di%)oun& &he ne& in-!ow% a& "ear 4 and nega&ie )o%&% a& "ear # &o &he

'age # o- 7
 EF5052 Investments Case 3: Arundel partners, The Sequel Projet

re%en& &ie a& "ear 0 he &a!e e!ow %how% &he 26 %eue! -i!% &ha& hae a o%i&ie
N'D
he &o&a! %u o- &he 26 %eue!% a))oun& -or 4901 .G whi)h diided " a!! &he 99
or&-o!io %eue!% gie% u% a ri)e o- 495.G er -i!

'age 4 o- 7
 EF5052 Investments Case 3: Arundel partners, The Sequel Projet

Ca!)u!a&ing &he a!ue o- a righ& wi&h &he +. ode!

hi% aroa)h )on%i%&% o- u%ing &he + o&ion ri)ing -oru!a &o ode! &he or&-o!io
righ& o- &he %eue!% he aria!e% o- &he + ode! -or a %e& o- %&o)ha%&i) aria!e% are
+o, $, r, , and %iga ;nd we a!" i& on &he or&-o!io in &he -o!!owing wa"B

Var 4escr('t(on Value

+o &he'Do-&heor&-o!ioa!ue 1#71
$ &heaeragenega&ie)o%&o-&he%e&o--i!% 226
r &he
ri%k
-ree
ra&e
6
a& 6
 &he &ie in whi)h &he de)i%ion o- aking &he %eue! i% ade >Y #A #
+iga &he%&andarddeia&iono-&he%eue!%re&urn 121

?%ing &he da&a on E<ihii& 7, we )an o&ain &he ean a!ue% o- &he 'or&-o!io a!ue a&
Y4 whi)h we wi!! di%)oun& &o Y0 u%ing a ra&e o- re&urn o- 12 -or ri%k" u%ine%%e%
he %&rike ri)e $ wi!! e &he ean a!ue o- &he nega&ie )o%& o- -i!% he &ie  -or
&he a&uri&" o- &he righ& wi!! e %e& on Y#, &ie in whi)h &he rodu)&ion o- &he %eue!
u%& e de)ided (ina!!" %iga, wi!! e &he %&andard deia&ion o- &he one"ear re&urn%
o- a!! &he -i!% o- &he or&-o!io he re%u!&% are %uaried in &he aoe &a!e
*- we were &o u%e &he Ca!! o&ion &a!e &he inu&% -or one"ne%% and Cuu!a&ie
o!a&i!i&" wou!d eB
 .one"ne%%B 07248#

Cuu!a&ie Do!a&i!i&"B %iga%r&>A I 121
he neare%& a!ue on &he &a!e wou!d e #55 &o eua&e C/+, u& we wi!! u%e a Ca!!
o&ion )a!)u!a&or &o o&ain &he e<a)& a!ue

he )a!! ri)e u%ing &he + ode! )a!)u!a&or i% 506.G er -i! hi% ri)e i% &he -air
ri)e )on%idering &he h"o&he&i)a! reenue% o- &he %eue!% 'ur)ha%ing an" righ& a& a
!ower a!ue wou!d e ro-i&a!e and i)e er%a

+uar" o- o&h e&hod% -or &he )a!)u!a&ion o- &he righ&% ri)e

Method Pr(ce
N'D di%)oun&ing 495 .G
+.ode! 506.G

;% "ou )an %ee on &he &a!e aoe, &he e%&ia&ed )a!! ri)e -or &he %eue!% righ&% i%
ui&e %ii!ar hi% )on-ir% &ha& &he &heor" ehind e%&ia&ing o&ion% ri)ing i%
)orre)&, u& wea&her i& i% &ru!" re!ia!e in &he rea! )a%e, wi!! on!" deend on &he
adeua)" o- &he a%%u&ion%

'age 5 o- 7
 EF5052 Investments Case 3: Arundel partners, The Sequel Projet

%hat are the 'r(+ar& ad.anta-es and d(sad.anta-es o) the a''roach &ou too* to
.alu(n- the r(-hts/ %hat )urther ass(stance or data ould &ou requ(re to re)(ne
&our est(+ate o) the sequel r(-hts> .alue/

:ur ana!"%i% o- &he roo%a! in)!ude% a ne& re%en& a!ue >N'D A )a!)u!a&ion o-
ea)h oie rodu)&ion )oan"  *& i% -e!& &ha& wai&ing &o ur)ha%e %eue! righ&% un&i!
a-&er &he oie goe% in&o rodu)&ion wi!! ake i& ore di--i)u!& and )o%&!" &o ur)ha%e
&he righ&% e!ow are adan &age% and di%ada n&age% o- &he aroa) h we &ook &o
a!uing &he righ&%
;dan&age%B

 +i!i)i&"
 e)au%e a!! aai!a! e da&a wa% u%ed, &here i% a grea&er %a!e in our ana!"%i% We
a%%ue &ha& ore da&a oin&% wi!! !ead &o a ore a))ura&e )on)!u%ion
 We did no& e!iina&e an" ou&!ier% e)au%e we -e!& ou&!ier% are )hara)&eri%&i) o- &he
indu%&r"
 he ana!"%i% i% a%ed uon hi%&ori)a! da&a ra&her &han -ari)a&ed a%%u&ion%
 We e!iee &ha& reaking ou& &he da&a " %&udio i% an adan&age e)au%e i&
roide% dire)&ion

@i%adan&age%B

 *& i% a%%ued &ha& hi%&ori)a! er-oran)e i% indi)a&ie o- -u&ure er-oran)e in

&he %hor& &er a%ed on hi%&ori)a! da&a :ur a%%u&ion i% %uor&ed " E<hii& 1
whi)h %how% &ha& a!! rodu)&ion )oanie% &end &o hae %ii!ar er-oran)e
oer &ie
 :n!" 1 "ear o- hi%&ori)a! da&a i% aai!a!e
 We a%%ue &ha& rodu)&ion )oanie% are wi!!ing &o %e!! &he %eue! righ&% under
our &er%
 'roai!i&ie% o- %u))e%% hae een )a!)u!a&ed, u& we hae no& een a!e &o a!"
&he &o &he er -i! a!ue *n %hor&, i& i% ne)e%%ar" &o e %ue)&ie aou& &he ri%k
a%ed on &he roai!i&ie% o- %u))e%%

(ur&her ;%%i%&an)e or @a&a

 .ore hi%&ori)a! da&a wou!d e u%e-u! &o %uor& our a%%u&ion%

 .ore da&a on %u))e%% roai!i&ie% a" he! &o dire)& &he )our%e o- a)&ion
 We wou!d a!%o !ike &o hae in-ora&ion aou& &he wi!!ingne%% o- rodu)&ion
)oanie% &o %e!! %eue! righ&% a& a renego&ia&ed ri)e

'age 6 o- 7
 EF5052 Investments Case 3: Arundel partners, The Sequel Projet

%hat 'ro,le+s or d(sa-ree+ents ould &ou e7'ect Arundel and a +ajor stud(o
to encounter (n the course o) a relat(onsh(' l(*e that descr(,ed (n the case/ %hat
contractual ter+s and 'ro.(s(ons should Arundel (ns(st on/

he %&udio% -u&ure ehaior )an )hange e)au%e o- &he e<i%&en)e o- &he )on&ra)& wi&h
;runde! 'ar&ner% >;'A *& igh& ake di--eren& oie% he %&udio wan&% &o wi&hho!d
oie% -ro ;' i- &he" know &he" wi!! e ig hi&%, i& wa% ir&ua!!" io%%i!e &o wri&e
)on&ra)&% wi&h &he %&udio% &ha& )ou!d aoid &hi% oor&uni%&i) ehaior

e)au%e o- &he )on-!i)&% o- in&ere%&, ;' roa!" needed %oe &"e o- )on&ra)&ua!
ro&e)&ion here are an" de&ai!% o- a o&en&ia! )on&ra)& e&ween ;runde! and %&udio
%&i!! need% &o e worked ou& (ir%& o- a!!, a %a&i%-a)&or" e&hod o- &he ri)e o- &he
righ&% a"en& had &o e agreed :ne o- o%%i!e wa"% %hou!d e ;runde! &o ake
a"en&% &o an e%)row a))oun& when a -ir%& -i! wen& in&o rodu)&ion

+e)ond!", Cer&ain -i!% igh& hae &o e e<)!uded -ro &he arrangeen& i- &he %&udio
i&%e!- did no& a!read" own &heir %eue! righ&%

hird!", in order &o kee &he %&udio )oi&&ed &o &he %u))e%% o- o%%i!e %eue!%, i&
roa!" wou!d e de%ira!e &o hae %&udio re&ain an in&ere%& in &he reenue% or &he ne&
ro-i&% o- &he %eue!%, or &o hae righ&% -or %u%euen& %eue!, ie, &hird, -our&h and &o
her -u&ure -i!%, reer& &o &he %&udio

.oreoer, i& i% good -or ;runde! &o -i< an e<ira&ion da&e -or &he %eue! righ&%,
erha% &hree "ear% -ro &he -ir%& -i!% re!ea%e, " whi)h &ie ;runde! wou!d hae &o
de)!are i&% in&en&ion% or -or-ei& &he righ&% hi% arrangeen& a" he! ;runde! &o hae
enough &ie &o de)ide whe&her &he" wi!! ake a %eue! ;nd ena!e i& &o ore ui)k!"
wri&e o-- i&% ine%&en& in righ&% i& )ho%e no& &o e<er)i%e

(ur&herore, ;runde! )ou!d grand i& a righ& o- -ir%& re-u%a! on an" righ&% i& !anned &o
%e!!
;& !a%&, &he )on&ra)& )ou!d roide &ha& ;runde! wou!d u%e &he srcina! %&udio -or
di%&riu&ion, a%%uing i&% di%&riu&ion -ee% and e<en%e% were )oe&i&ie

'age 7 o- 7