NATIONAL TAIWAN UNIVERSITY OF SCIENCE AND TECHNOLOGY

Financial Management
Case#0
A-Rod: Signing the Best Player in Baseball

Group 5:
D10708004 賴岳炫 M10808011 黃允柔
M10820015 陳宣穎 M10821836 Le Quy Ha My
M10918002 曲怡萱 M10918013 謝立萱
M10918018 林雨玟 M10918020 李亮穎

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 Case#0 A-Rod: Signing the Best Player in Baseball

Problem 1
Q: What is the after-tax present value of the incremental costs of signing A-Rod ?

We get the data of base salary, signing bonus and amount deferred about Rodriguez proposed contract from Exhibit5.
The incremental costs of signing A-Rod including salary and insurance during 2001 to 2010, and also the deferred amount during 2011 to 2020.
We use the relevant information to calculate the incremental costs per year and get the present value:
The related calculation:
▪ Shortstop Average Salary = Salary for replacement short stop * ( 1 + baseline salary inflation rate 16.50% )
Ex. Year2001: 3,000,000*(1+16.50%)=3,495,000
▪ Deferred salary ( from 2011) = Deferred amount * ( 1 + interest rate on deferred money 3% )^10
▪ Total contract amount = Base salary + Signing bonus – Deferred amount + Deferred salary Base salary
▪ Total Incremental Salary = Total contract amount - Shortstop Average Salary Signing bonus
▪ Insurance = ( Base salary + Signing bonus ) * contract insurance percentage 10% Deferred salary
▪ Total Incremental Costs = Total Incremental Salary + Insurance ( deferred amt. )
▪ Total pre-tax present value of incremental costs = Σ Total Salary costs per year Total Contract amount
( Shortstop Average Salary )
Total Incremental Salary
Ans: Insurance costs
▪ Total pre-tax present value of incremental costs =127,400,034 Total Incremental Costs per Year
▪ The total after-tax present value of incremental costs = 127,400,034 x (1 - tax rate 40%) =76,440,021

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 Case#0 A-Rod: Signing the Best Player in Baseball

Shortstop Base salary Signing Deferred Deferred Total Ttl. Incremental Insurance Total Incremental
Years
Average Salary bonus salary amt. contract amt. Salary (10% rate) Costs per Year

2001 3,495,000 21,000,000 2,000,000 (5,000,000) 18,000,000 14,505,000 2,300,000 16,805,000.00

2002 4,071,675 21,000,000 2,000,000 (4,000,000) 19,000,000 14,928,325 2,300,000 17,228,325.00
2003 4,743,501 21,000,000 2,000,000 (3,000,000) 20,000,000 15,256,499 2,300,000 17,556,498.63
2004 5,526,179 21,000,000 2,000,000 (3,000,000) 20,000,000 14,473,821 2,300,000 16,773,820.90
2005 6,437,999 25,000,000 2,000,000 (4,000,000) 23,000,000 16,562,001 2,700,000 19,262,001.35
2006 7,500,268 25,000,000 (4,000,000) 21,000,000 13,499,732 2,500,000 15,999,731.57
2007 8,737,813 27,000,000 (4,000,000) 23,000,000 14,262,187 2,700,000 16,962,187.28
2008 10,179,552 27,000,000 (3,000,000) 24,000,000 13,820,448 2,700,000 16,520,448.18
2009 11,859,178 27,000,000 (3,000,000) 24,000,000 12,140,822 2,700,000 14,840,822.13
2010 13,815,942 27,000,000 (3,000,000) 24,000,000 10,184,058 2,700,000 12,884,057.78
2011 6,719,582 6,719,582 14,505,000 6,719,581.90
2012 5,375,666 5,375,666 14,928,325 5,375,665.52
2013 4,031,749 4,031,749 15,256,499 4,031,749.14
2014 4,031,749 4,031,749 14,473,821 4,031,749.14
2015 5,375,666 5,375,666 16,562,001 5,375,665.52
2016 5,375,666 5,375,666 13,499,732 5,375,665.52
2017 5,375,666 5,375,666 14,262,187 5,375,665.52
2018 4,031,749 4,031,749 13,820,448 4,031,749.14
2019 4,031,749 4,031,749 12,140,822 4,031,749.14
2020 4,031,749 4,031,749 10,184,058 4,031,749.14

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 Case#0 A-Rod: Signing the Best Player in Baseball

Problem 2
Q: How many extra tickets do you expect the Rangers to sell each year if they sign A-Rod?
What is the after-tax present value of those additional spectator? (Hint: consider using a regression)
▪ We use regression to calculate the number of additional spectator per win based on Settle Mariners’ historical data (Table2.1) and get the
formula:
 y= -1330567.76+46054.8x
▪ In this case, baseball experts predicted that A-Rod could enable the team to win 8 additional games
Table2.1 The historical wins and audience data of
per year. We use the above formula to calculate how many spectators that A-Rod will probably bring
Settle Mariners from 1990-2000(from Exhibt6)
each year:
Seattle
 y= 46054.8 * 8wins = 368,439 wins attendance
Mariners
▪ We calculate by multiplying the number of people added each year by the unit price of each income:
1990 77 1,509,727
▪ Incremental ticket sales = 368,439*$18 = $6,631,902
▪ Incremental parking = 368,439*$2.5 = $921,097.50 1991 83 2,147,905

▪ Incremental merchandise = 368,439*$1.8 = $663,190.2 1992 64 1,651,367

▪ Due to the inflation, we use an inflation rate of 3.5% to calculate the value of total annual income each 1993 82 2,052,638

year 1994 49 1,104,206

Ex. total income of year 2001 = (6,631,902+921,098+663,190) *(1+3.5%)^1 = $8,503,756 1995 79 1,643,203
1996 85 2,723,850

Ans: 1997 90 3,192,237

▪ We expect the Rangers will sell 368,439 extra tickets if they sign A-Rod based on the number of spectator 1998 76 2,651,511
increase each year. 1999 79 2,915,908
▪ The after-tax present value of additional spectator is 39,300,942 2000 91 3,148,317

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 Case#0 A-Rod: Signing the Best Player in Baseball

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Spectators
Increase per
368,439 368,439 368,439 368,439 368,439 368,439 368,439 368,439 368,439 368,439
year

ticket sales
6,631,902 6,631,902 6,631,902 6,631,902 6,631,902 6,631,902 6,631,902 6,631,902 6,631,902 6,631,902

parking
921,097.50 921,097.50 921,097.50 921,097.50 921,097.50 921,097.50 921,097.50 921,097.50 921,097.50 921,097.50

merchandise
663,190.20 663,190.20 663,190.20 663,190.20 663,190.20 663,190.20 663,190.20 663,190.20 663,190.20 663,190.20

total income
8,503,756.34 8,801,387.81 9,109,436.38 9,428,266.66 9,758,255.99 10,099,794.95 10,453,287.77 10,819,152.85 11,197,823.20 11,589,747.01
total income
after tax 5,102,253.80 5,280,832.69 5,465,661.83 5,656,959.99 5,854,953.59 6,059,876.97 6,271,972.66 6,491,491.71 6,718,693.92 6,953,848.20

· Use excel formula NPV(8%, total income 2001-2010) to calculate, the pre-tax present value in 2000 = $65,501,570.22
· After-tax present value in 2000 = $39,300,942.13

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 Case#0 A-Rod: Signing the Best Player in Baseball

Problem 3
Q: What is the change in the probability of the Rangers of participating in the American League Championship Series and the World Series?
What are the expected after-tax cash flows and the associated after-tax present value?
(Hint: please see the information on the playoff probabilities for the Rangers)

▪ The change in probability of the Rangers to get into American League Championship Series(ALCS) is 7%
▪ The change in probability of the Rangers to reach is 3.5%
▪ We use the given numbers of the incremental revenue for reaching ALCS and World Series (10,000,000 & 20,000,000), to calculate the
expected after-tax Cash flows per year by multiplying probability (7% & 3.50%) and inflation rate 3.5%:
Ex. Cash flow of year2001 before tax = (10,000,000*7%+20,000,000*3.5%)*(1+3.5%) = $1,449,000
Cash flow of year2001 after tax =1,449,000*(1-40%) = $869,400

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cash 1,449,000.00 1,499,715.00 1,552,205.03 1,606,532.20 1,662,760.83 1,720,957.46 1,781,190.97 1,843,532.65 1,908,056.29 1,974,838.26
Flows

CFs after 869,400.00 899,829.00 931,323.02 963,919.32 997,656.50 1,032,574.47 1,068,714.58 1,106,119.59 1,144,833.78 1,184,902.96
tax

PV of
CFs 805,000.00 771,458.33 739,314.24 708,509.48 678,988.25 650,697.07 623,584.69 597,602.00 572,701.91 548,839.33

▪ After-tax present value in 2000 = 6,696,695

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 Case#0 A-Rod: Signing the Best Player in Baseball

Problem 4
Q: Will the signing of A-Rod increase the potential sales price of the Rangers? If so, what is 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.
▪ For the tangible value,
Tangible benefits
· Total local revenue: we use the total income from problem2 as the local
Local Revenue $ 8,503,756.34
value and minus the revenue sharing, which is regulated to transfer a
(Revenue Sharing) (1,445,638.58)
portion to a pool and distribute to the lower-profit teams.
Total Local Revenue $ 7,058,117.76
· Revenue sharing = local revenue *revenue sharing percentage 17%
incremental revenue from ALCS/WS 1,449,000.00
 65,501,570*17% = 11,135,266.94
additional Sponsorship Revenue 1,000,000.00
· Incremental revenue from ALCS and WS: 1,449,000 from problem3
Tangible value before multiplier $ 9,507,117.76
· Additional sponsorship revenue: 1,000,000 from hint #9
Total tangible value $ 28,521,353.29
· Potential sales price of the Rangers: Total Tangible Value
= tangible value* franchise value revenue multiple 3.0
 9,507,117 *3 = $28,521,353 Intangible benefits

▪ For the intangible value, additional franchise values 100,000,000.00

· Additional franchise value of glamour factor: 100,000,000 from hint#7 Total intangible value $ 100,000,000.00

Ans: Total incremental value $ 128,521,353.29

▪ Yes, the signing of A-Rod will increase the value of the Rangers as the following
calculation chart present value before tax 119,001,253.04
▪ Base on the tax rate 40% and discount rate 8%, after-tax present value present value after tax $ 71,400,751.83
is $ 71,400,751.83

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 Case#0 A-Rod: Signing the Best Player in Baseball

Problem 5
Q: 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.

Present Value pre-tax after-tax

benefits $119,001,253 $71,400,752
costs $127,400,034 $76,440,021
difference -$8,398,781 -$5,039,269
ticket prices 2.28 1.37

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