Q1.

Prior to 1995, why was America Online (AOL) so successful in commercial online industry relative to its competitors Compuserve and Prodigy? Q2. As of 1995, what are the key changes taking place in commercial online Industry? How are they likely to affect AOLs future prospects? Q3. Was AOLs policy to capitalize subscriber acquisition costs justified prior to 1995? Q4. Given the changes discussed in question 2, do you think AOL should change its accounting policy as of 1995? Is the companys response consistent with your view? Q5. What would be the affect on AOLs 1995 balance sheet if all the capitalized subscriber acquisition costs were written off? If AOL expensed all the subscriber acquisition costs incurred in fiscal 1995 during the same year, what would be the affect on its income statement? Q6. AOLs share price as of November 8, 1995 was $81.63. In October 1995, the company issued $100million worth of shares (1.713 millio shares at $58.73 per share). Its book value as of June 30, 1995 was $217.944 million. Assuming there is no change in AOLs book value other than due to the new issue, compute AOLs market to book value ratio as of November 8, 1995. Q7. Assuming a perpetual average growth rate in book value of 15% per year, calculate the long-run average on equity needed to be earned by AOL to justify its market to book ratio as of November 8,1995? Q8. Based on you analysis in questions 1-5, do you think the ROE and growth rate assumptions implied by AOLs market to book ratio realistic?