The CEO of Arundel Partners would like a report and presentation detailing the viability of Arundels business model. Specifically, they would like concise answers to the questions below. They would like the answers in the form of a three to four-page report (excluding attachments) and are willing to sit in on a brief presentation that brings across the main points of the report.

1) There are two possible reasons why Arundel Partners wants to enter the sequel rights business: a. Studios undervalue sequel rights, allowing Arundel to purchase them cheaply. b. Studios are willing to sell sequel rights for low prices in order to get the cash they often desperately need to finance the first film. Discuss why the first reason is unlikely to be a sustainable business model and the second reason is more likely to be sustainable in the long-run.

2) Create a general timeline showing the production and release of both a first film and its sequel. Discuss the best time at which Arundel should purchase the rights to a sequel. Justify your reason in the context of information asymmetries. (That is, the private information that Arundel or the movie studio might know about the potential profitability of a sequel at various points in the timeline.)

3) Suppose that Arundel purchases the sequel rights to all 99 movies from Exhibit 7 and exercises every option to produce a sequel. Exhibit 7 provides the average cost (at t=3) and average cash inflow (at t=4) for a sequel. What is the NPV at t=0 of producing a sequel, on average? Discuss. Assume a discount rate of 12 percent here and throughout the assignment.

4) Suppose that Arundel purchases the sequel rights to all 99 movies from Exhibit 7 and chooses to only exercise the rights to the sequels that seem profitable. That is, those hypothetical sequels from Exhibit 7 that have a one-year return greater than 12 percent.1 a. How many sequels would Arundel produce? b. What is the total PV of net inflows at t=4 from these sequels? c. What is the total cost at t=3? d. What is the NPV of producing these sequels? e. What is the maximum Arundel would be willing to pay for the 99 sequel rights? 1 You should invest in projects that provide a return greater than your discount rate; recall the internal rate of return (IRR) rule from introductory finance.

5) Some of the assumptions used in question 4(e) may not be feasible. Discuss the following assumptions: a. Are all movies sequelizable? Present a list of the movies for which you chose to make sequels in Question 4(a) and discuss why some of those sequels are not possible. b. Suppose Arundel only has the resources to make ten sequels. Choose ten movies from your answer in 4(a) and present your choices. What is the maximum Arundel would be willing to pay for the 99 sequel rights, based on this choice of ten movies? c. Movie studios are sometimes reluctant to hand over sequel rights after observing the success of the initial film. Could you see this being a potential problem? d. Are there any other reasons why it might not be possible to produce a sequel? e. Discuss any other potential roadblocks to the success of Arundels business model.

6) A studio manager stated that she would not turn down $2M per sequel right. If you paid $2M per sequel right, are you purchasing them for less than what they are valued?