Academic journal article Journal of the International Academy for Case Studies

Securitizing an Athlete's Future Income: The Vernon Davis Tracking Stock

Academic journal article Journal of the International Academy for Case Studies

Securitizing an Athlete's Future Income: The Vernon Davis Tracking Stock

Article excerpt

CASE DESCRIPTION

This case deals with evaluating an uncommon stock offering that promises a return based on an athlete's future income. The case has a difficulty level of four, appropriate for senior level. The case is designed to be taught in three class hours and is expected to require approximately six hours of outside preparation by students.

CASE SYNOPSIS

Financial intermediaries perform a valuable task of repackaging risk-return attributes of investment options. High-profile athletes expecting a huge payoff in future may be interested in giving up a portion of their future income in return for a payment now. Sports fans and investors, on the other hand, may be interested in buying stock in an athlete in anticipation of an attractive payoff in the future. Fantex, Inc, a financial intermediary, is proposing to sell stock in Vernon Davis, a 49ers tight end, in return for a share in Davis's future income.

INSTRUCTORS' NOTES

This case is based on a real initial public offering, however, some details have been excluded to focus on the basic valuation concepts. The case tests whether students are able to apply the discounted cash flow approach to value an uncommon stock offering.

Stacey's Questions

In general, Stacey's questions deal with the following:

1. What valuation technique should be used?

2. What are the cash flows to shareholders if the discounted cash flow technique is to be used?

3. For how many years should the cash flows be forecasted?

4. What discount rate should be used?

Suggested Answers

1. The discounted cash flow approach should be used. The comparative valuation approach cannot be used as the benchmark valuation multiples (i.e. price to cash flow) are not provided.

2 & 3. The following assumptions may be made to simplify the calculations:

* Today is December 31st, 2013.

* Cash flows will be received at the end of each calendar year.

* Fantex does not owe any corporate taxes on its cash flow from its 10% ownership in the Davis brand.

It is recommended that students estimate cash flows to shareholders and the stock value under two scenarios:

(a) Davis's NFL contract will not be renewed after 2015.

(b) Davis's NFL contract will be renewed after 2015 for six years for a total value of $33 million to be received in equal annual installments. …

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