AOL TIME WARNER

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AOL TIME WARNER

• Group Project
• Finance 4332

2
Group 1

• Aceves, Luis
• Huddleston, C. Eric
• Mai, Khanh

• Pham, Ly
• Phan, Claudine
• Rodriguez, Nancy

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Overview

• Background Analysis
• Company Distribution
• Industry
• Stock Information
• Financial Ratios
• Free Cash Flow

• Cost of Equity
• Risk Analysis
• Cost of Capital
• Optimal Capital Structure
• Market Efficiency
• 5-Year Stock Price

4
Background Analysis

• America Online
• Founded 1985
• Based in Dulles, Virginia
• AOL/CompuServe 60 internet audience
• AOL International offers services in 17 countries
  and 8 languages
• AOL members worldwide log 1 billion hrs/mo.

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Background Analysis

• Time Warner
• Leading media company prior to merger
• Composed of
• CNN, TNT, Cartoon Network, Home Box Office
• Industries
• Music, Films, TV, Animation, Cable
• AOL Time Warner
• Created in 2001 Merger

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Background Analysis

• Under the Umbrella
• America Online
• AOL Time Warner Book Group
• Little, Brown Co.
• AOL Time Warner Interactive Video
• Home Box Office
• New Line Cinema

• Time
• Time Warner Cable
• Turner Broadcasting System
• Warner Brothers
• Warner Music Group
• Atlantic and Electra

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Background Analysis
EXECUTIVE OFFICERS OF THE COMPANY
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Background Analysis

• Age range 40-64
• No Family Relationships
• Larger company
• fewer problems within management.

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Company Distribution
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Computer Services Industry
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Stock Information

• The daily trading volume is about 22.3 million
• 71.1 billion-market capitalization
• The expected HPR for 2003 is 0.18

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Financial Ratios
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Free Cash Flow

• This is not a good sign.
• Mainly due to negative Net Income

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Cost of Equity

• The equation being used to calculate Ke requires
  the constant growth model.
• Ke (FCFF/shares)/P G
• Ke (-102,564 mill./ 4,305 mill.)
• /15.280 0.437
• Ke -1.1222 -112.22

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Risk Analysis

• Beta 1.476
• COV(RAOL, RSP500)/VAR(RSP500)
• Beta-unlevered 0.676
• Equity/(Equity (1-T)Debt(BetaEquity)
• CAPM Ke is greater than DCF Ke
• Based on the calculations of cost of equity, the
  current stock is overpriced.

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Cost of Capital

• WACCWeKe Wdkd(1-T) Wp Kp

• WACC
• 2000 0.067683
• 2001 0.081017
• 2002 0.074008

• Kd
• 2000 0.013584
• 2001 0.029900
• 2002 0.032906

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Optimal Capital Structure
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Market Efficiency

• February 2, 2000 Lawsuit speculations

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Market Efficiency

• April 14, 2000 Wall Street failing

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5-YEAR PRICE

• Prices were unstable from 1999 to 2001
• There has been a steady increase in price since
  February 2003.

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Conclusions

• Nothing for AOL Time Warner looks good in the
  short-term. However, we say HOLD!!!
• Why?
• If there is a positive future income, stock price
  will increase.

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• Love, Peace, and Hair Grease!!!
• Thank You