Appendix: un c ertainty, C V P . Kristina Larsson is the Stockholm promoter for Gustav Häglund.

Appendix: un c ertainty, C V P .

Kristina Larsson is the Stockholm promoter for Gustav Häglund. Larsson is promoting a new world championship fight for Häglund. The key area of uncertainty is the size of the cable pay-per-view TV market. Larsson will pay Häglund a fixed fee of SKr 2 million and

25% of net cable pay-per-view revenue. Every cable TV home receiving the event pays SKr

29.95, of which Larsson receives SKr 16. Larsson pays Häglund 25% of the SKr 16.

Larsson estimates the following probability distribution for homes purchasing the pay-per- view event:

Demand

Probability

100 000

0.05

200 000

0.10

300 000

0.30

400 000

0.35

500 000

0.15

1 000 000

0.05

Required

1 What is the expected value of the payment Larsson will make to Häglund?

2 Assume the only uncertainty is cable TV demand for the fight. Larsson wants to know the breakeven point given her own fixed costs of SKr 1 million and her own variable costs of SKr 2 per home. (Also include Larsson’s payments to Häglund in your answer.)

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