HW 6

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School

University of Nebraska, Omaha *

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Course

3030

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Accounting

Date

Apr 3, 2024

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docx

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Acct 3030 Homework Assignment #6 – Intangible Assets 1. This assignment is due at 11:59pm on the due date posted in Canvas. The assignment must be submitted electronically via Canvas. Include all group member names on the assignment. Please do not email me your homework. 2. You may submit your homework in Excel, Word, or .pdf style (not .zip or other). Format the pages for printing and provide all group members’ names and section numbers on the front page. Additionally, please include at least one team member’s name in the name of the electronic file so it is unique – don’t call your file something like “hw1.xls”. 3. The assignment may be done in groups (ideally, not more than 4 people). You may work with students across my sections, if you like. While we will only grade one copy of the HW from each group, each member is able to submit a copy of the homework through Canvas to ensure submission is done properly (i.e., you cannot see other student submissions, only your own). If there is no homework turned in with your name on it, you will not receive credit. 4. The standard university Honor Code applies to this assignment. Other than the members of your group, you may not consult with any other person about this assignment. Insert the following statement on the first page of the document that includes all group member names: “ On my honor, as a University of Nebraska at Omaha student, I have neither given nor received unauthorized assistance on this work.” It will apply for all students whose names are on the homework. Page 1 of 4

Consider AOL Time Warner’s 2002 10-K: http://www.sec.gov/Archives/edgar/data/1105705/000095014403004064/g81332e10vk.htm 1. Looking at the financial statements (beginning on page F-59), what does AOL Time Warner report intangible assets on December 31, 2001 ? $7,289 million (subject to amortization) + $37,708 million (not subject to amortization) = $45,997 million 2. What is the key activity that generated most of AOL’s intangible assets in 2001 ? AOL Time Warner's 2001 intangible assets, mainly goodwill, stemmed from the significant America Online merger. 3. The book equity value of the firm is listed as $152,027M on December 31, 2001. Could you have purchased the firm for that amount on that date (try to estimate the market value of the firm on that date)? Provide support for your answer. NOTE : I have provided a pdf (TWX Historical Prices) that includes useful numbers to calculate this and incorporates adjustments for stock splits. If you use an alternative source (e.g. Yahoo Finance), you will need to adjust for stock splits. Market Value=32.1×4.305 billion shares Market Value= 138.1905 Yes, I can purchase the firm for less than its book value. Page 2 of 4

4. What insights does your estimate of the market value of equity relative to book value of equity give you about the firm? What about the intangible assets? Market Perception: Higher market value suggests optimism, while lower may signal caution or market skepticism about prospects. Intangible Assets: Premium over book value indicates high regard for intangibles; discount suggests skepticism or uncertainty. 5. One year later, on December 31, 2002, there is substantially less goodwill in the balance sheet. Why? Goodwill reduction on 2002 balance sheet likely due to impairment, reflecting changes in market or performance. 6. What is the definition of the economic term “winner’s curse”? The "winner's curse" refers to a situation in which the winning bidder in an auction overpays. 7. How might the concept of “winner’s curse” apply to the concept of accounting goodwill? Overpayment Risk: Acquiring firm may overvalue target, risking paying more for goodwill than its actual economic worth. Market Dynamics: Changing conditions may diminish acquired assets' value, leading to impairment of accounting goodwill. Integration Challenges: Page 3 of 4

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Successful integration is vital; if challenging, goodwill may not realize expected benefits, triggering winner's curse. Future Performance: Disappointing future results may reveal overestimation, regretting the premium paid for accounting goodwill acquisition. 8. How have the market value of equity and book value of equity changed one year later (December 31, 2002)? 2001 2002 Book value 152,027 52,817 Mil Market Value 138.161 55.78 Bil So, decrease in both of the Book value and the market value over the year. Page 4 of 4