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.)