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Case 2

This document provides instructions for a case study assignment on the potential signing of baseball player Alex Rodriguez by the Texas Rangers baseball team. Students are asked to work in groups of four to analyze: 1) the pre-tax present value of costs to sign Rodriguez; 2) additional ticket sales and revenue from signing Rodriguez using regression analysis; 3) changes in playoff probabilities and cash flows from signing Rodriguez; 4) impact on potential future sale price of the Rangers; 5) risks of the contract and how to mitigate them; 6) whether the Rangers should offer Rodriguez the contract; 7) how the contract compares to what two other teams should offer; and 8) any additional factors to consider. The assignment aims to apply financial analysis techniques like

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437 views2 pages

Case 2

This document provides instructions for a case study assignment on the potential signing of baseball player Alex Rodriguez by the Texas Rangers baseball team. Students are asked to work in groups of four to analyze: 1) the pre-tax present value of costs to sign Rodriguez; 2) additional ticket sales and revenue from signing Rodriguez using regression analysis; 3) changes in playoff probabilities and cash flows from signing Rodriguez; 4) impact on potential future sale price of the Rangers; 5) risks of the contract and how to mitigate them; 6) whether the Rangers should offer Rodriguez the contract; 7) how the contract compares to what two other teams should offer; and 8) any additional factors to consider. The assignment aims to apply financial analysis techniques like

Uploaded by

kiloin hhop
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN

College of Business
D E P AR T M E N T O F F I N AN C E

Finance 321 Advanced Corporate Finance Spring 2007

Case 2 (20 points)


A-Rod: Signing the Best Player in Baseball - Harvard Business School Case 9-203-047
Due April 5, 2007

Pick up this case and the book Moneyball in the Finance Department office, 340 Wohlers. Keith
Green has provided these to you compliments of Allstate.

For this project you are to work in teams of four, and turn in one analysis for each team. Unless you
let me know otherwise, I will assume you are working in the same teams as for case 1.

The learning objectives of this case are:

1. to apply regression analysis to determine the impact of additional wins by a baseball team on
attendance, and therefore revenue.
2. to apply discounted cash flow analysis to a complicated set of cash flows

Your analysis of this case should include the following:

1) Executive Summary of 1-2 pages that briefly describes the situation and indicates your
findings. This section should not assume that the reader has read the case, or already knows
about the issues involved. In business, this is the most important aspect of your report, since
in practice many people will read only this part of your report. Thus, it has to be a well
written, stand-alone document that provides all necessary information, with the details left to
the rest of the report.
2) What is the pre-tax present value of the incremental costs of signing Alex Rodriguez?
3) How many extra tickets do you expect the Rangers to sell each year if they sign Rodriguez?
What is the pre-tax present value of those additional spectators? (Apply regression analysis
to determine this. There is more than one way to do this, and more than one set of variables
to include.)
4) Assume that the probability of the Rangers making the playoffs without Rodriguez is 4/14,
and that it would increase to 6/14 if he is on the team. Assume the chance of advancing to
the League Championship if they make the playoffs is 50% with or without Rodriguez, and
the chance of advancing to the World Series is 50% with or without Rodriguez if they are in
the League Championship. Calculate the change in probability of the Rangers participating in
the League Championship and the World Series and the expected pre-tax cash flows and
associated pre-tax present value if they sign Rodriguez.
5) What impact will the signing of Rodriguez have on the potential sale price of the Rangers?
Assume that the Rangers would be sold in ten years, right after his contract expires.
Calculate the pre-tax present value of any increase in sales price of the team.
6) What are the key risks involved in this contract for the Rangers? How can these risks be
mitigated?
7) Should the Rangers offer Rodriguez this contract? Explain your decision.
8) Calculate the value of Rodriguez to each of the two teams listed on the front page your Case
1 report. Use the regression analysis you performed for question 3 to determine the extra
revenue from any increase in attendance he would generate for the team, the increase in
revenue from additional playoff potential as calculated in question 4, and any increase in the
teams sale price as calculated in question 5, all adjusted as necessary to reflect the teams you
are representing. Determine the pre-tax present value of the largest contract you would
recommend that each team make for Rodriguez. Indicate any assumptions you made in
performing this calculation. How do these offers compare with the Rangers offer?
9) Are there any additional factors that should be considered with this case? If so, please
describe them.

The Case Study method is intended to provide practice in writing business reports on realistic
situations. While this class does not teach business writing, your report will be graded based on the
appropriate use of business writing skills. Spelling and grammar are expected to be correct and the
report should look professional. The report should be typed and can include spreadsheets, but
should not include hand drawn figures or handwritten calculations.

The case itself provides most of the information you need to perform the analysis, but in order to
obtain full credit on this assignment (20 points) you also need to find and utilize other relevant
information. Please cite the source of any additional material used in your report.

Keith Green has provided an example of the calculations involved in this case in his lecture on March
27. You may base your analysis on this approach, but you need to perform your own regression
analysis to determine the expected additional attendance per win.

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