Question

Five years ago Bianca Curtis wrote what has become the leading Tort textbook.She has been receiving royalties based on revenues reported by the publisher. These revenues started at $2 million in the first year, and grew steadily by 5% per year. Her royalty rate is 10% of revenue. Recently, she hired an independent auditor who discovered that the publisher had been under reporting revenues. The book had actually earned 20% more in revenues than had been reported on her royalty statements. A) Assuming the publisher pays an interest rate of 4% on missed payments, how much money does the publisher owe Diana? B) The publisher is short of cash, so the publisher agreed to pay 50% of the royalty shortfall in cash today and increase Bianca’s royalty rate on future book sales to pay for the remaining 50% shortfall. Assume the book will 10 generate revenues for an additional 10 years and that the current revenue growth of 5% will continue. If Diana would otherwise put the money into a bank account paying interest of 3%, what royalty rate would make her indifferent between accepting an increase in the future royalty rate and receiving the total cash owed today.

Answer 1

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