SPAD604 Homework 4

SPAD 604 – Sport Finance & Economics Homework #4 Instructions: This assignment requires you to apply concepts related to our learning modules on Risk and Time Value of Money. Make sure to pay attention to the wording within each question to properly apply the correct equation/formula. You are not required to upload your calculations to Blackboard; those are for you to keep. However, you should utilize your calculations and incorporate them into your discussion question responses, which is the part that you will be submitting on Blackboard under “Homework #4”. The best homework submissions are those that incorporate specific information and financial calculations into their answer to defend what they are saying. Part 1 – Time Value of Money 1) Major League Baseball (MLB) organizations commonly utilize large long-term contracts to entice free agents to sign with the team. Over the past several years, five all-star caliber infielders have signed long-term guaranteed contracts with an organization, including: Fernando Tatis Jr. – 14 years/$340 million Francisco Lindor – 10 years/$341 million Xander Bogaerts – 11 years/$280 million Trea Turner – 11 years/$300 million Corey Seager – 10 years/$325 million Annual payouts for these contracts are as follows:   Fernando Tatis Jr Francisco Lindor Xander Bogaerts Trea Turner Corey Seager 2021 $11,000,000         2022 $3,489,011 $48,000,000     $37,500,000 2023 $5,617,284 $27,000,000 $30,000,000 $27,272,727 $35,000,000 2024 $11,000,000 $27,000,000 $25,000,000 $27,272,727 $34,500,000 2025 $20,000,000 $27,000,000 $25,000,000 $27,272,727 $32,000,000 2026 $20,000,000 $27,000,000 $25,000,000 $27,272,727 $31,000,000 2027 $25,000,000 $27,000,000 $25,000,000 $27,272,727 $31,000,000 2028 $25,000,000 $27,000,000 $25,000,000 $27,272,727 $31,000,000 2029 $36,000,000 $27,000,000 $25,000,000 $27,272,727 $31,000,000 2030 $36,000,000 $27,000,000 $25,000,000 $27,272,727 $31,000,000 2031 $36,000,000 $27,000,000 $25,000,000 $27,272,727 $31,000,000 2032 $36,000,000 $5,000,000 $25,000,000 $27,272,727   2033 $36,000,000 $5,000,000 $25,000,000 $27,272,730   2034 $36,000,000 $5,000,000       2035   $5,000,000       2036   $5,000,000       2037   $5,000,000       2038   $5,000,000       2039   $5,000,000      

2040   $5,000,000       2041   $5,000,000       For each of these players, calculate: a) The Net Present Value (NPV) of their contract b) The dollar difference between the contract amount and the contract’s NPV c) The percentage difference between the contract amount and the contract’s NPV Use the following known/estimated annual inflation rates to assist with your calculations: 2021: 4.7% 2022: 8.0% 2023: 4.5% 2024 – 2028: 2.1% per year 2029 – 2033: 3.0% per year 2034: 7.7% 2035: 6.5% 2036 – 2041: 2.5% per year 2) You are an MLB player agent. Your client, Tommy Fastball, is one of the most sought-after free agents on the market. He is 29 years old, has accumulated more than 100 wins in his MLB career, and finished in the Top 5 in Cy Young Award voting twice. Tommy’s pitching repertoire includes a wicked curveball, sublime slider, killer change-up, and average fastball. At this point in his career, Tommy is ready to cash in on a large long-term contract. As Tommy’s agent, you are charged with helping him understand the financial ramifications of each contract offer presented to him. The following fully guaranteed contract offers have been made from MLB organizations: Atlanta Braves: 10 years/$240 million Chicago Cubs: 9 years/$230 million Cincinnati Reds: 8 years/$270 million LA Dodgers: 5 years/$200 million Annual payouts for each contract offer are presented below:   Atlanta Braves Chicago Cubs Cincinnati Reds LA Dodgers 2024 $30,000,000 $20,000,000 $25,000,000 $40,000,000 2025 $30,000,000 $20,000,000 $25,000,000 $40,000,000 2026 $30,000,000 $20,000,000 $20,000,000 $40,000,000 2027 $30,000,000 $20,000,000 $20,000,000 $40,000,000 2028 $20,000,000 $20,000,000 $20,000,000 $40,000,000 2029 $20,000,000 $32,500,000 $20,000,000   2030 $20,000,000 $32,500,000 $20,000,000  

2) The table below lists five publicly traded companies involved in the sport media industry. Based on recent market trends, the table indicates the projected amount received back on a $10,000 investment into each company under five different scenarios: Worst (10% probability of occurrence); Bad (25% probability of occurrence); Medium (30% probability of occurrence); Good (25% probability of occurrence); and Best (10% probability of occurrence). Scenario Worst Bad Medium Good Best Probability 10% 25% 30% 25% 10%   Projected Return on Investment Rogers Communications $8,500 $9,500 $10,500 $11,000 $12,000 MSG Entertainment $6,000 $8,000 $10,500 $13,000 $14,500 Liberty Media $7,800 $9,200 $10,500 $11,000 $12,000 Sinclair Broadcast Group $7,000 $8,000 $10,500 $12,500 $13,000 Walt Disney Co. $6,000 $8,500 $10,500 $11,400 $12,300 Based on this information, calculate: a) The expected return on each investment b) The expected rate of return on each investment c) The portfolio expected rate of return assuming an investment portfolio comprised of these 5 companies where each company holds the same weight in the portfolio Discussion Questions Based on the work completed for this assignment and our in-class discussions, answer the following questions on Blackboard by Friday, February 16 th at 11:59pm EST to receive credit for this assignment. 1) How might a sport organization and athlete have different perspectives on the concept of time value of money within a contract negotiation? What variables influence these perspectives? 2) Within the first homework assignment question, which contract provided the best financial value for the organization? Why? Within the second homework assignment question, which contract offer provides your client with the best financial value? Why? 3) What is the expected return on investment for a new soccer-specific stadium in Louisville? What is the expected rate of return on this investment? Why is it important to conduct a sensitivity analysis when projecting expected return and rate of return on an investment? 4) What is the portfolio expected rate of return based on investment return projects for the 5 sport media industry corporations? Would the expected rate of return on this portfolio of investments be desirable given current market conditions? Why or why not?