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FINANCIAL MANAGEMENT Case Report

Case 0 A-ROD: SIGNING THE BEST PLAYER IN BASEBALL

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1. What is the after-tax present value of the incremental costs of signing A-Rod? The incremental costs of signing A-Rod =

salary (2001-2010) + insurance (2001-2010) + deferred amount (2011-2020)

o Shortstop average salary = salary for a shortstop * (1 + baseline salary inflation rate 16.50%) o Deferred salary (2011-2020) = deferred amount * ( 1 + interest rate on deferred money 3%)10 o Total contract amount = base salary + signing bonus – deferred amount + deferred salary o Total incremental salary = total contract amount – shortstop average salary o Insurance = (base salary + signing bonus) * insurance premium 10% o Total incremental costs = total incremental salary + insurance o Total pre-tax PV of incremental costs = Σ total salary costs per year

Total after-tax PV of incremental costs = $76440020.67

2. How many extra tickets do you expect the Rangers to sell each year if they sign ARod? What is the after-tax present value of those additional spectators? (Hint: consider using a regression) Variables: a. Increase in average number of wins: 8 b. Number of additional fans per win: 45,000 c. Average incremental ticket price: $18 d. Average incremental parking/concessions: $2.5

e. f. g. h.

Average merchandise per fan: $1.8 Discount rate: 8% Inflation rate: 3.5% Tax rate: 40%

Calculation: Extra Tickets : 8 x 45,000 = 360,000/year

Total after-tax present value of those additional spectators : $33,296,259 3. What is the change in the probability of the Rangers participating in the American League Championship Series and the World Series? What are the expected aftertax cash flows and the associated after-tax present value? (Hint: please see the information on the playoff probabilities for the Rangers) ❖ The probability of The Rangers participating in the American League Championship (ALC) and the World Series (WS) was 7% and 3.5%. 3.5% participation as we assume that each team has a 50% probability of participating in the World Series. ❖ Expected after-tax cash flows and the associated after-tax present value 2001

2002

2003

2004

2005

10,000,000

10,000,000

10,000,000

10,000,000

10,000,000

700,000

700,000

700,000

700,000

700,000

420,000

420,000

420,000

420,000

420,000

After-taxed PV

388,889

360,082

333,410

308,713

285,845

Simple Inflation (3.5%)

402,500

372,685

345,079

319,517

295,850

Compound Inflation (3.5%)

402,500

385,729

369,657

354,255

339,494

2006

2007

2008

2009

2010

10,000,000

10,000,000

10,000,000

10,000,000

10,000,000

700,000

700,000

700,000

700,000

700,000

420,000

420,000

420,000

420,000

420,000

ALS Championship Incremental Revenue Pre taxed cash flow

ALS Championship Incremental Revenue Pre taxed cash flow

After-taxed PV

264,671

245,066

226,913

210,105

194,541

Simple Inflation (3.5%)

273,935

253,643

234,855

217,458

201,350

Compound Inflation (3.5%)

325,349

311,792

298,801

286,351

274,420

2001

2002

2003

2004

2005

10,000,000

10,000,000

10,000,000

10,000,000

10,000,000

35,000

35,000

35,000

35,000

35,000

21,000

21,000

21,000

21,000

21,000

After-taxed PV

19,444

18,004

16,670

15,436

14,292

Simple Inflation (3.5%)

20,125

18,634

17,254

15,976

14,792

Compound Inflation (3.5%)

20,125

19,286

18,483

17,713

16,975

WS Championship Incremental Revenue Pre taxed cash flow

2006

2007

2008

2009

2010

10,000,000

10,000,000

10,000,000

10,000,000

10,000,000

35,000

35,000

35,000

35,000

35,000

21,000

21,000

21,000

21,000

21,000

After-taxed PV

13,234

12,253

11,346

10,505

9,727

Simple Inflation (3.5%)

13,697

12,682

11,743

10,873

10,068

Compound Inflation (3.5%)

16,267

15,590

14,940

14,318

13,721

WS Championship Incremental Revenue Pre taxed cash flow

The expected after-tax cash flows (before the inflation) = 2,959,146 The expected after-tax cash flows (after the inflation - compounded) = 3,062,716 The expected after-tax cash flows (after the inflation - simple) = 3,515,765 4. Will the signing of A-Rod increase the potential sales price of the Rangers? If so, what is the after-tax present value? Assume that the Rangers would be sold in ten years, right after the expiration of A-Rod’s contract. Both tangible and intangible value should be calculated in the incremental value. Total local revenue: we use the total income from problem2 as the local value and minus the revenue sharing, which is regulated to transfer a portion to a pool and distribute to the lower-profit teams.

Revenue sharing = local revenue *revenue sharing percentage 17% 65,501,570*17% = 11,135,266.94 Incremental revenue from ALCS and WS: 1,449,000 from problem3 Additional sponsorship revenue: 1,000,000 from hint #9 Potential sales price of the Rangers: Total Tangible Value = tangible value* franchise value revenue multiple 3.0 9,507,117 *3 = $28,521,353

Ans: ▪ Yes, the signing of A-Rod will increase the value of the Rangers as the following calculation chart ▪ Base on the tax rate 40% and discount rate 8%, after-tax present value is $ 71,400,751.83

5. Should the Texas Rangers sign A-Rod? If you find that the after-tax present value of the incremental costs exceeds the after-tax present value of incremental benefits, how much would ticket prices have to increase for the Rangers to breakeven? Ans: ▪ According to problem#1, the present value of the incremental costs of signing A-Rod is $127,400,034, however the present value of the benefits is $119,001,253 which is lower than costs, so we think that Texas Rangers should not sign A-Rod.

▪ Base on the previous question, the after-tax present value of the incremental costs ($76,440,021) are exceeding the after-tax present value of incremental benefits ($71,400,752), and the difference is $8,398,781 pre-tax and $5,039,269 after-tax. We divided the difference by total incremental spectators 3,684,390 to calculate that the ticket prices should increase about $2.28 (pre-tax) to reach the breakeven....