1) With the information in the case, please prepare a draft for the 2004/2005 season budget. Be aware that the figures in the case do not include the effect of the expected galctico acquisition for the 2004/2005 season. When preparing the budget consider the following decisions: a.- With respect to the policy of new player acquisition Real Madrid is considering two options: i. Acquiring two megastars at an estimated cost of 40 million each in transfer fees and an annual salary of 10 million, or ii. Acquiring four rising stars, young players with enormous potential at an estimated cost of 15 million each in transfer fees and an annual salary of 3 million. In this decision please take into account the following considerations: (1) The new players will most likely affect the sale of team jerseys. New players' names will be popular in the sale of new jerseys.1 However, some of these sales will come at the expense of cannibalizing sales of existing players' jerseys. The marketing department has prepared the following estimation of royalty income from team jerseys as a function of the players acquired and the money invested in equipment advertising: Team Jersey Royalties ( Millions) Advertising 4 Rising Royalties Base 2 Megastars Stars 0% 40.0 46.0 41.4 2% 41.3 48.6 42.6 4% 42.3 50.6 43.5 6% 43.1 52.3 44.3 8% 43.6 53.3 44.7 (2) The acquisition strategy will affect the sport potential of the team. Most sport analysts believe the rising stars strategy will have a more positive impact in the chances of advancing further in the Champions League and winning the Spanish La Liga. The immediate economic implications of sport performance are the following: (a) Advancing one more round in the Champions League increases Real Madrid's revenue by 5 million partly for additional ticket revenue and partly for increased participation in the UEFA marketing pool. Winning the Champions League only produces a 3.5 million increase over qualifying for the semifinal (as the final is played in a neutral stadium only increases participation in the pool). (b) Advancing one more round in the Champions League increases salary expenses by 1 million and winning the competition will trigger bonus payments to players for 14 million. b.- On October 29, 2004 the Spanish newspaper El Mundo announced that an online betting firm, Betandwin.com had offered Barcelona C.F. 15 Million a year for having its logo in the team jersey. Respected sport journalist Josep Mara Casanovas wrote the same day in the Barcelona C.F. friendly newspaper Sport that this was an opportunity that cannot be missed. Would you recommend to Jos ngel Snchez that he should explore the possibility of signing a sponsorship contract with Betandwin.com? c.- Real Madrid does not officially decide on the accelerated amortization until the end of the fiscal year. However, you can hypothesize what would you recommend for the 2004/05 season. Would your recommendation depend on the amount Real Madrid decided to invest in bringing new players to the roster? d.- Real Madrid would like to invest as much as possible in the construction of the Ciudad del Real Madrid. The amounts being considered are between 50 and 100 million. 2) Please prepare the monthly cash budget taking into account the following legal and contractual circumstances: a.- As of June 30th 2004 the cash balance for Real Madrid was 169 million. b.- Member dues are payable July 1st (usually 70% of the dues are collected during July, 20% in August and the remaining 10% in September) C.- Exhibition games are prepaid (cash is received in July) d.- TV broadcast rights are paid 50% in July and 50% in January. e.- Current marketing contracts stipulate one payment of 50% in July and 2 payments of 25% each in January and March. f.- Jersey royalties are received in roughly equal monthly payments throughout the year contingent on actual sales. g.- Transfer fees according to contract but the payments agreed for each year are due in July h.- Salary expenses: i. Monthly minimum payment of 3,000 per player(for a total of 200,000 per month) ii. In August and February Real Madrid has to make two payments to the Spanish Tributary Agency of 20% of the salaries as tax withholdings (for a total 40%). iii. The main payments to players are due two halves in July and January. i.- Investments in the Ciudad del Real Madrid: equal monthly payments throughout the year j.- Corporate Taxes are paid in 4 approximately equal installments in October, January, April and July. k.- Other operating expenses: equal monthly payments throughout the year 1.- In the case that cash payments exceeded cash inflows Spanish banks would be willing to cover the temporary cash needs at costs close to EURIBOR (European Interbank Offer Rate). 3) After preparing the cash budget, would you change in any way the strategic decisions analyzed previously? How would you try to structure the payments of the contracts? How much would you be willing to give up in order to obtain the suggested payment structure