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Category > Accounting Posted 14 May 2017 My Price 7.00

Metro-Goldwyn-Mayer Studios Inc. (MGM) is a major producer

 

Metro-Goldwyn-Mayer Studios Inc. (MGM) is a major producer and distributor of theatrical and television filmed entertainment. Regarding theatrical films, MGM states, “Our feature films are exploited through a series of sequential domestic and international distribution channels, typically beginning with theatrical exhibition. Thereafter, feature films are first made available for home video generally six months after theatrical release; for pay television, one year after theatrical release; and for syndication, approximately three to five years after theatrical release.”

Assume that MGM releases a film during early 2009 at a cost of $115 million, and releases it halfway through the year. During the last half of 2009, the film earns revenues of $140 million at the box office. The film requires $45 million of advertising during the release. One year later, by the end of 2010, the film is expected to earn MGM net cash flows from home video sales of $36 million. By the end of 2011, the film is expected to earn MGM $19 million from pay TV; and by the end of 2012, the film is expected to earn $4 million from syndication.

a. Determine the net present value of the film as of the beginning of 2009 if the desired rate of return is 20%. To simplify present value calculations, assume all annual net cash flows occur at the end of each year. Round to the nearest whole million dollars.

Partial Present Value of $1 Table

Present Value of $1 at Compound Interest

Year

6%

10%

12%

15%

20%

1

0.943

0.909

0.893

0.870

0.833

2

0.890

0.826

0.797

0.756

0.694

3

0.840

0.751

0.712

0.658

0.579

4

0.792

0.683

0.636

0.572

0.482

5

0.747

0.621

0.567

0.497

0.402

6

0.705

0.564

0.507

0.432

0.335

7

0.665

0.513

0.452

0.376

0.279

8

0.627

0.467

0.404

0.327

0.233

9

0.592

0.424

0.361

0.284

0.194

10

0.558

0.386

0.322

0.247

0.162

b. Under the assumptions provided here, is the film expected to be financially successful?

 
 

Answers

Alpha Geek
(8)
Status NEW Posted 14 May 2017 02:05 PM My Price 7.00

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