Obscure Valuation Question
Hi all, just a quick, somewhat obscure valuation question that I was asked in an interview:
"Consider this scenario--
A songwriter is paid a $2mm advance from music publishing company to acquire 25% of the writer's songwriting income for 10 years. The songwriter retains 75% ownership. The publisher's initial $2mm cash outflow is an "advance", so the songwriter does not receive any income until that advance is recouped (i.e. no income until $2mm/.75= $2.66mm is recouped).
The question is: how do we perform a valuation of the songwriter's income? In other words, how do we arrive at the $2mm advance number? Walk me through it."
Any help would be much appreciated
Also, the interviewer wanted me to approach it as a DCF, no multiples, comps, etc.
Search Bowie Bonds.
Just discount the future cash flows from songs back using some cost of equity. You could get pretty creative with the valuation.
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