tutor discussion and response
CHAPTER 7 Risk Analysis, Real Options, and Capital Budgeting Page 205 Even in the best of times, movies often bomb at the box office. In May 2023, the movie Hypnotic, starring Ben Affleck and Alice Braga, hit theaters with the slogan, “Control is an illusion.” But the film’s box office was the real illusion. Critics were harsh, saying the movie was “confusing and poorly constructed” and it had “atrocious acting, cheap CGI, and poor dialogue.” Ouch! Looking at the numbers, Hypnotic’s losses were mesmerizing. Moviemakers Ketchup Entertainment and Relativity Media reportedly spent $65 million on the production cost, while the box office amounted to only $16 million. And this does not account for money spent on marketing and distribution. In fact, about 4 of 10 movies lose money in theaters, though streaming and DVD and Blu-ray sales often help the final tally. Of course, there are movies that do quite well. Also in 2023, the Universal Pictures movie Barbie raked in over $1.4 billion worldwide at a production cost of $145 million, and The Super Mario Bros. Movie raked in over $1.3 billion with a budget of $100 million. Obviously, Ketchup Entertainment and Relativity Media didn’t plan to lose $50 million or so on Hypnotic, but it happened. As this flop shows, projects don’t always go as companies think they will. This chapter explores how this can happen, and what companies can do to analyze and possibly avoid these situations.
Discussion Prompt: (No more than 300 words)
In this Discussion, please reflect on the week’s topics. Choose a topic from Chapters 7
Your research should provide a measure of information about the topic’s significance to the current business climate. At least two reference sources should be used to support a substantive and detailed response. Make sure to give credit to your sources, though formal citations are not required. Please be thorough and respectful on the discussion board. Check your grammar, punctuation, and spelling before posting.
Reference sources must be limited to the Wall Street Journal, Financial Times, New York Times, Barron’s, Investors’ Business Daily, The Economist, or an academic journal article from a respected accounting or finance journal.
reference
Li, J., Mi, Z., Yi-Ming, W., Fan, J., Yang, Y., & Hou, Y. (2019). Flexible options to provide energy for capturing carbon dioxide in coal-fired power plants under the Clean Development Mechanism.
Mitigation and Adaptation Strategies for Global Change, 24(8), 1483-1505.
Mathews, S. (2009). VALUING RISKY PROJECTS WITH REAL OPTIONS.
Research Technology Management, 52(5), 32-41.
Respond JB (No more than 150 words)
The valuation process is central to how investors decide where to allocate capital in pursuit of strong longterm returns. As Smart and Zutter explain in Chapter 8 of
Fundamentals of Investing, valuation is fundamentally about determining an asset’s worth by comparing expected future cash flows to the return required for the specific risk taken (Smart and Zutter, 2019). This framework is primarily executed through the Discounted Cash Flow method, which is widely regarded as the most reliable approach for assets that generate future benefits. To reach a defensible estimate, investors must evaluate the timing, magnitude, and uncertainty of those cash flows while determining a required rate of return that compensates for marketspecific risks.
Today’s business climate makes this process even more critical as firms operate in an environment shaped by shifting interest rates, tighter capital markets, and rapid technological disruption. These conditions reduce the reliability of historical averages and simple heuristics (Mero and Haapio, 2022). Within the context of common stock, the Dividend Discount Model remains a hallmark of Chapter 8, yet modern investors need research that reflects realtime market dynamics to adjust equity risk premium inputs effectively. When the cost of capital changes quickly, valuation becomes a forwardlooking exercise that depends on accurate data rather than outdated projections (Mauboussin and Callahan, 2023).
Research strengthens every stage of valuation by helping investors evaluate industry trends, pricing power, regulatory exposure, and the sustainability of free cash flows. It also clarifies which risks are cyclical and which may permanently impair a firm’s terminal value. Smart and Zutter emphasize that a stock is a worthwhile investment only when its intrinsic worth justifies the price investors are asked to pay. This is especially important in a market where intangible assets such as proprietary data and intellectual property represent a growing share of enterprise value (Bagna et al., 2024).
Strong research increases confidence in the final valuation because investors prefer estimates grounded in current market conditions rather than optimistic assumptions. Incorporating updated data, comparable company analysis, and sensitivity testing strengthens the credibility of investment conclusions. Although no model eliminates risk, these structured methods help investors identify overpriced assets and maintain a necessary margin of safety in an unstable market. Investors then use these valuation outputs to guide portfolio construction, adjust position weights, and determine whether to buy, hold, or exit a security based on how closely its expected return aligns with required return thresholds.
Respond WI (No more than 150 words)
In chapter 9, we examine New York Stock Exchange and Nasdaq’s functions as the secondary markets and their importance in liquidity and price discovery. The primary market consists of the initial money raising of a company by selling stocks. The secondary market consists of subsequent transactions involving the purchase and sale of shares between investors. The critical importance of the secondary market lies in the ability of the investors to trade the securities, which in turn gives them the confidence to invest and facilitates the raising of the capital by the companies. Furthermore, brokers and dealers enhance this trading by matching buyers and sellers or holding stocks and selling them at a profit to the buyers at a price higher than the price at which the seller bought the stock.
A modern case of secondary trading of stocks is in Formula 1, which is Owned by Liberty Media, a publicly traded company and which has a tracker stock trading on the Nasdaq. Since the tracker stock is traded in the secondary market, the investors regularly trade the stock, thereby reassessing the value of Formula 1, taking into consideration its financial performance, media contracts, as well as the number of fans it has in different parts of the world. As such, trading in the secondary market helps to update the stock price by incorporating the recent developments relating to the company.
The Financial Times has reported that Formula 1 has been making a lot of money, and it can thank its new and recurring sponsors, new broadcasting contracts, and a growing demand for F1 worldwide. The Financial Times mention that F1 is one of the sports that is making money the fastest, and the F1 fan base is growing in the USA, which, in turn, allows F1 to add more races to the calendar (Financial Times, 2024). As the new and recurring sponsors, broadcasting contracts, and demand for F1 continue to grow, demand for Liberty Media’s Formula One tracking stock will either buy or sell F1’s stock, which will affect the market cap.
The Wall Street Journal states that because of the built up media exposure and fan interaction, Formula 1 has become very popular, which directly correlates to the rise in demand for Liberty Media’s Formula One tracking stock, and it’s a great example of the stock market thinking highly of the F1 business (Wall Street Journal, 2023). Increased demand, increased trading activity, which will also the market to more efficiently determine the value of the company.
The stock market principles presented in Chapter 9 are easily recognizable today. Investors in secondary markets, like Nasdaq, are able to trade shares while considering the newest information relating to the our performance as a company. The rapid growth of Formula 1 under Liberty Media has become an example for investors, demonstrating the combination of investor expectations, media rights, and market liquidity as drivers of stock value in the current world economy.
