Question

1. Franchise Value Suppose that Mark Cuban wants to purchase the Mavericks in 2000 (call this year 0), and he expects to receive S400,000 in profits in years 1, 2, and 3 (each year). Now suppose that value of the Mavericks in year 3 is $500 million and that the interest rate is 4%. 1. What is the expected benefit from owning this team for 3 year. (Find EB using the formula and example from chapter 2 notes)
Using this formula F V = P V (1 + i) t for number 1

Answer 1

Answer :

Question 1)

A) profit each year P=$400000=$0.4 millions

Value at 3year end S =$500 million

Interest rate r=4%

Expected Benefit =P/(1+r)^1+P/(1+r)^2+P/(1+r)^3+ S/(1+r)^3

E(B)=0.4/(1+4%)^1+0.4/(1+4%)^2+0.4/(1+4%)^3+500/(1+4%)^3

E(B)=$445.61 millions

B)

The Maximum price for Team= expected profit =$445.61 millions

C) at maximum price The mark doesn't earn any profit and if he buys the team less than Expected profit than he will earn profit other wise he will earn lose.