1. The rights to Frederico Fellini’s film “La Strada” are to be auctioned. You forecast that you can collect annual cash flows in the form of royalties, net of taxes, as shown in the table below. At the end of the forecast horizon, you plan to sell the rights in a future auction. You forecast you can get $2,4000,000 for the rights, after taxes, at the end of year 5. If your target rate of return is 8.50%, what is the maximum price you should offer for the rights [round to the last dollar]? Year 1 2 3 4 5 Annual Cash Flow $340,000 $370,000 $400,000 $420,000 $450,000 Auction Proceeds $2,400,000 Maximum Price: 2. With reference to question 1, rather than auction the rights at the end of year 5, the alternative is to retain the rights. You forecast that beginning in year 6, the film will provide cash flows of $475,000 in perpetuity. What is the maximum price you should offer for the rights [round to the last dollar]? Maximum Price:
1. The rights to Frederico Fellini’s film “La Strada” are to be auctioned. You
|
Year |
1 |
2 |
3 |
4 |
5 |
|
Annual Cash Flow |
$340,000 |
$370,000 |
$400,000 |
$420,000 |
$450,000 |
|
Auction Proceeds |
|
|
|
|
$2,400,000 |
Maximum Price:
2. With reference to question 1, rather than auction the rights at the end of year 5, the alternative is to retain the rights. You forecast that beginning in year 6, the film will provide cash flows of $475,000 in perpetuity. What is the maximum price you should offer for the rights [round to the last dollar]?
Maximum Price:
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