-184-
costs.134 Mr. Wagner projected VHS conversion costs of $3,200 per
film title and duplication and distribution costs of $2.50 per
unit. On the basis of discussions with industry insiders,
including Michael Herz, Mr. Wagner projected cover art and
marketing costs as $7,500 per film title.
iii. Net Cashflows
To arrive at a net annual cashflow, Mr. Wagner deducted
total projected expenses from projected revenues for each EBD
film title. He then aggregated the net cash flows for the EBD
film titles to arrive at a net cashflow for the entire EBD film
library. He applied a 40-percent tax rate to come up with the
after-tax cashflows for the EBD film library.
iv. Valuations
Mr. Wagner discounted the after-tax cashflows to December
11, 1996, using a real weighted average cost of capital of 10
percent (rounded), arriving at a present value of $6.8 million
for the EBD film library. He also projected a $2.3 million
amortization tax benefit for the acquisition cost of the EBD film
library. Using these figures, Mr. Wagner calculated a $9.1
million value, as of December 11, 1996, for the 65 film titles in
the EBD film library. Alternatively, Mr. Wagner calculated a
134 In estimating these costs, he assumed that the buyer of
the EBD film library already had a distribution structure;
therefore, the costs associated with maintaining a distribution
structure were not included.
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