Arundel Partners: The Sequel Project

Purchase the sequel rights associated with films produced by one or more
major U.S. movie studios

Purchase sequel rights before the first film made

a. Studio formed opinions about the movie and the likeliness that a sequel would
be possible once production started.
b. Arundel would then have to negotiate the price for sequel rights on each film
produced
c. Arundel knows much less than the production studio about the film.
d. Conclusion: the number of films and a price per film are agreed upon before
either Arundel or the studio knew which films would generate the option of a sequel.

Help finance production of initial films

Purchase all of the sequel rights for a studios entire production during a
specified period

Purchasing Studios Entire Production Sequel Rights or just Major Films

Sequel Rights

Profits depends on whether the NPV of the production companys movies is

higher than the estimated 2 million required to purchase the rights.

NPV Approach

Using studios sequels discounted inflows and negative costs, and find the PV of
profits

Real Option Calculation

Consider the investment on sequel rights as a call option, and use Black-Scholes
formula to find price for the option

Interest rate = 6% semi-annually;

Compound Interest =

1 = 12.36%

NPV Sequel Right at time 0

=

Average sequel right based on movie share is calculated by

NPV SR0 X =

Major Studios

NPV for average sequel

right

Average sequel
right based on
produced movie
share

Number of Movies

MCA UNIVERSAL

4.47

0.63

14

PARAMOUNT PICTURES

-4.67

-0.47

10

SONY PICTURES
ENTERTAINMENT

-7.66

-2.86

34

TWENTIETH CENTURY FOX

-4.83

-0.54

11

WARNER BROTHERS

-0.51

-0.10

19

THE WALT DISNEY

COMPANY

6.08

0.68

11

99
0.63 = 4.47 * (14 / 99)

Call Price

C = S*N(

S = expected revenue of a companys sequels discounted to t=0

K = expected cost of a companys sequels

T = time-to-maturity (assume 1 year period)

= standard deviation of one year return

) K*

*N(

r = compound rate per period

=

and

Option pricingestimation of per-film value of a portfolio of sequel rights

Major Studios

N(

MCA UNIVERSAL

4.47

22.3

0.7198

12.36%

1.69
85

2.418
3

0.0447

PARAMOUNT PICTURES

-4.67

24.7

0.8717

12.36%

N/A

N/A

N/A

SONY PICTURES
ENTERTAINMENT

-7.66

22.5

1.3155

12.36%

N/A

N/A

N/A

TWENTIETH CENTURY
FOX

-4.83

21.9

0.5894

12.36%

N/A

N/A

N/A

WARNER BROTHERS

-0.51

22.2

1.6303

12.36%

N/A

N/A

N/A

THE WALT DISNEY

COMPANY

6.08

23.2

1.0975

12.36%

0.55
87

1.656
2

0.2882