The returns should be based on the magnitude of the cash flows that you make on the investment. The cash flows are there for the real and are very hard to manipulate. For the matter of fact, the accountants tend to spend all their energy in doing that only. Accounting profit can be easily distorted by the accountants. Rather than looking at the accounting profit, we should look at the cash flows. The lessons learned from this incident can be applied in every field of valuation. That’s why he ended up with billions of dollars in his bank account while Winston Groom couldn’t. He gets his percentage share when the ticket gets sold and after that, the movie company can do with the revenue whatever they want to do. You got what you deserved.” This is what happens when you put your faith in the accounting profit.ĭo you know what Steven Spielberg‘s contract specifies as a percentage of? Movie ticket receipts. The judge said: “So basically you put your faith in the hands of the accountant? Is that right?” He said: “I guess so.” The judge said: “The case dismissed. Groom, is this the contract you signed?” He replied yes. The judge took a look at the contract and asked: “Mr. Winston Groom said that it’s not fair and decided to contest it in the court. He asked provision for what? They replied that provision for future bad movies. They said that they haven’t named that yet but that’s a provision. So he looked down at the expense items and he noticed a big expense item of $140 million. He went to their office to have a look at the accounting books and found out that they were making $80 million loss. They asked him to come and take a look at their accounting books. He asked that how can you guys be losing money on this movie as it has grossed more than $200 million in revenues. They replied that they are not making any money but are losing money. So he called Paramount and asked them: “Where is my 3% share?” They replied: “3% of what?” He said: “3% of the accounting profits of the movie.”. He thought that maybe they lost his address. He kept on waiting for the cheque for weeks. He was thinking about the profits that he would get. Winston was on cloud nine after hearing the success stories of the movie. Now the movie went to production and then to distributors. Winston found the deal attractive and agreed for it. The author was contracted by the Paramount group for the screenplay rights for his book for $350,000 and for a 3 percent share of the firm’s net profits. The movie was based on the book Forrest Gump authored by Winston Groom. It took only 66 days to surpass $250 million and became one of the highest-grossing movies of all time. These lectures will help you a lot in understanding the corporate finance and equity valuation concepts of CFA level II curriculum.įorrest Gump was the fastest grossing Paramount film to pass $100 million, $200 million, and $300 million in box office receipts (at the time of its release). You can listen to his corporate finance lectures from here and equity valuation lectures from here. The professor always comes up with such anecdotes and is surely one of the best professors in the world. He was discussing the accounting controversy related to the movie Forrest Gump. I was listening to the corporate finance lectures from Professor Aswath Damodaran.
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