Raj Kumar

PGP30121
Arundel Partners: The Sequel Project
Situation Analysis
Steps in movie production

Production
Distribution
Exhibition

Cost Structure

Production Cost: It is called as Negative cost which includes preproduction,

principal photography and post production.
Distribution Cost: Distribution expenses and distribution fees
Exhibition Cost: 50% was remitted by theatre to distributors

Sequel

Cost 120% of original movie

Revenue 70% of original movie

Timeline

Issues to be considered:

Number of movies and price per movie as Arundel partner do not want to
negotiate at the later stage when studio knows about movie status better
than them
Method of payment
Tax Issues like expiration of rights

Make the sequel

NPV>0

NO
Make the sequel

NPV<0

Movie a Success ?

Buy right to movie sequel?

NO
YEAR 3

YEAR 4

Case Solution
Value per film is 4.95 as calculated using NPV discounting model

Valuing the Sequel rights using Black-Scholes Formula:

Call Price

C = S x N (d1) K x e^ (-Rt) x N (d2)

D1 = In(S/K)/(SDT) + 0.5 SDT,

Var
S
K
r
T
Sigma

D2= d1-SDT

Description
Current price of underlying = expected revenue of sequel discounted to
t=0
Strike price = Expected cost of a Sequel (Which has to be covered by
revenue)
the risk free rate at 6%
the time in which the decision of making the sequel is made (Y 3)
the standard deviation of the sequels return

Value
13.71
22.6
6%
3
1.21

N (d2) and N (d1) The probability that a standardized, normally distributed random
variable is less than or equal to d1 or d2
Using the data on Exihibit 7, we can obtain the mean values of the Portfolio
value at Year4 which we will discount to Y0 using a rate of return of 12%.
S = 21.6/1.12^4 = 13.71
The strike price K will be the mean value of the negative cost of films.
K = 21.6/1.12^4 =
The time T for the maturity of the right will be set on Y3, time in which the
production of the sequel must be decided.
Sigma, will be the standard deviation of the one-year returns of all the films of the
portfolio. The results are summarized in the above table.
If we were to use the Call option table the inputs for moneyness and Cumulative
volatility would be:

Moneyness: 0.72483
Cumulative Volatility: sigma*sqrt(T) = 1.21

The nearest value on the table would be 35.5% to equate C/S, but we will use a Call
option calculator to obtain the exact value. The call price using the BS model
calculator is 5.06M$ per film.
Summary of both methods for the calculation of the rights price.
Method
NPV discounting
Black-Scholes

Price
4.95 M$
5.06 M$

As you can see on the table above, the estimated call price for the sequels rights is
quite similar.