Assignment Questions: 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 "galactico" acquisition for the 2004/2005 season.When preparing the budget, consider the following decisions: a. For 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 player will most likely affect the sale of team jerseys.New players' names will be popular in the sale of new jerseys.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 net royalty income (after advertising expenses)

MBAD 6213 Course Syllabus, Spring 202011

from team jerseys as a function of the players acquired and the money invested in equipment advertising:

2. The acquisition strategy will affect the sport potential of the team.Most sports analysts believe the rising starts strategy will have a more positive impact on the chances of advancing further the Champions League and winning the Spanish La Liga.The immediate economic implications of sports 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 the 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 14million 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 sports journalist Josep Maria Casanovas wrote the same day in the Barcelona C.F. friendly newspaper Sport that this was an opportunity that could not be missed. Would you recommend to Jose Angel Anchez 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.Make a recommendation for the 2004/2005 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: (for Extra Credit) a. As of June 30, 2004, the cash balance for Real Madrid was 169 million b. Member dues are payable July 1 (typically 70% of the dues are collected during July, 20% in August, and the remaining 10% in September) c. Exhibition games are prepaid with cash received in July d. TV broadcast rights are paid 50% in July and 50% in January

Team Jersey Royalties ( Millions) Advertising/ Royalties Base 2Megastars 4 RisingStars 0% 40.0 46.0 41.4 2% 40.5 47.6 41.7 4% 40.6 48.6 41.8 6% 40.5 49.2 41.6 8% 40.1 49.0 41.1

MBAD 6213 Course Syllabus, Spring 202012

e. Current marketing contracts stipulate one payment of 50% in July and two 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 payments of 3,000 per player (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 of 40%) iii. The main payments to players are due in 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 l. In the case that cash payments exceeded cash inflows Spanish banks would be willing to cover the temporary cash needs at costs to close to EURIBOR 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 to obtain the suggested payment structure? (For extra credit) 4. Thinking about the budget at your company and comparing it to the budgetary process at Real Madrid, could you assess the differences and similarities between the use of the budget at your company and its use at Real Madrid? 5. Please look at the description of the budgetary process in Exhibit 7. Why do you think the process is structured in this way? Is the design of certain stages more suited than others to achieve certain organizational objectives? 6. What do you think of the public nature of budget discussions at Real Madrid? What would be the consequences of doing this in a publicly-traded company, say GE or IBM?How would it affect what you put in the budget? 7. Should it be used to evaluate Jose Angel Sanchez's performance? How would you judge his performance? Should Sanchez's targets be stretched? What are the benefits and costs of stretch targets?