Financial management : Gus Van Sant vs. Johnny Depp

Résumé du document

You have just been hired to take over as the CFO of a major US film studio. Your first project is to make a recommendation on a project that has been plagued with problems from the start. Here is the history of the project: Three years ago, the development department bought the movie rights to the best selling novel "Cloudburst? for $1,000,000 (estimated to be worth $2,000,000 today). The idea was to take the rights off the market so that no other film studio could get them, since it was a highly sought after book. About a year later, one of the star directors of the studio, Gus Van Sant, became interested in further developing the project into a feature length film. The studio let him work on the story and promised to pay him $2,000,000 to direct it, but only if the film is completed. At this point, the studio approached Johnny Depp, who agreed to star in the movie, and he was paid $5,000,000 immediately. He was to receive another $5,000,000 once he completed the movie. He also insisted that Juliette Binoche, with whom he had enjoyed a good working relationship in an earlier film, play the female lead. The studio agreed to hire her for $7,000,000 to be paid upon completion of the film. Filming began on the project and has continued for a year, and up until now, the total cost incurred is $60,000,000, not including any actors' salaries. Van Sant and Depp, however, can no longer work together. The head of the studio wants the studio to remain on good terms with both Van Sant and Depp. Consequently, it has turned to you, the CFO, to make a purely financial recommendation.

Extraits

[...] Project $ - [...]

[...] The larger corporation also has theme parks, a music division, and a publishing unit. Describe how this might affect your financial evaluation of the projects. NPV calculation and payback period are very useful tools to evaluate if a project will be profitable or not. To evaluate our return on investment, we have to isolate costs and take only the ones which are part of our investment operating. For instance, sunk costs do not enter in our calculation contrary to the opportunity costs. [...]

[...] Marketing costs = 200,000,000$ Cost of production: This cost needs to be paid this year to finish the production of the movie. It is spent in year 0 and is so part of the initial cash flow. Cost of production = 150,000,000$ Salaries: The main actors and the director must be paid. Juliette Binoche: The French actress is also playing in this second scenario with Johnny Depp. The studio agreed to hire her for $7,000,000 to be paid upon completion of the film. [...]

[...] The shareholders make financial decisions; they have the decision power. They have the right to elect the Chief Executive Officer of the company and receive an appropriate share of any dividends. Shareholders care about only one thing: the price of the share! This is why even if the CEO takes clever decisions but don't please the shareholders, he can be fired. The objective of shareholders is to make the company growing fast, usually in a short-term period in order to receive the maximum of dividends. [...]

[...] To conclude, the CEO has the incentives for acting in the interest of the shareholders and not only in its own for several reasons: - He is elected (or reelected) by the shareholders and has generally shares in the company (or stock-options) - He can be fired by the shareholders if they estimate that his actions are not profitable enough. - The shareholders have the right to transfer ownership and can so act on the management. - He is generally paid depending on the price of the shares, so taking care of the shareholders' interest is also taking care on its own interest. [...]