Reference no: EM133575289

Case Study: Suppose that a league is contemplating expansion, and it expects the new team to finish "growing up" in its third year (t=0 to 2). Determine the expansion fee if, each year, the overall value of ownership (V) is expected to be $900; cost (C) (including the new owner's opportunity cost) is expected to be $750; and the interest rate (r) is 2%. Assume initially that there are neither expected impacts on the national TV contract nor local costs for current owners.

Questions:

1. What franchise fee would we expect existing owners to charge new owners?
2. What factors might cause the actual fee to be higher or lower than what you calculated for part a?
3. Now suppose that addition of the expansion team will add $300 to the national TV contract (?N) each year, but will impose local costs (L) of $250 for all existing teams (combined) each year.
4. How might the franchise fee be affected? Explain carefully.
5. Suppose that existing owners are wrong, and that the combined local costs for existing teams are much higher (say $700).
6. Does this mean that the league charged too little or too much for an expansion fee? Briefly explain (and calculate what existing owners would charge if they had this information before setting the fee).
7. If the existing owners properly estimated the local impacts and adjusted the fee accordingly, would the prospective new team be willing to pay the fee and join the league? Explain.