America on Line Share Value Evaluation

1 . Would you like to buy the shares of AOL? The company issued shares even if the price per share came down from $72 to $58.37.

No .

Company have capitalized its expenses to longer duration .

In highly dynamic world of online services , the product life is getting shorter n shorter , and increase in competition will ultimately leads to fall in cost and hence profit .

Where as the acquisitions cost and customer acquiring cost have not changed .

Although the company have expected that customer will stay for 41 months , but its just an prediction .

Selling the share 19 % lower than its initial value simply shows that company is in desperate need of cash and in a way borrowing it at 18% loss in form of equity .

With no major differentiation services in pipeline and existing customers moving to competitor shows that down ward trend will soon be followed , as there will be no dividend or profit .

Hence high capitalization , high merger cost , increase in competition and feasibility of customer to move to other competitor with any cost and pressure of price reduction , will ultimately leads to fall in revenue .

Hence the share price will further fall , nor it is an good investment in short term due to high capitalization cost , nor in long term due to entrance of players in market .

2 . Current price per share is $81.63 (November 8, 1995). What is the correct price per share in your opinion?

AOL

VALUATION ISSUES

PB Ratio

Price per Share (08/11/95) $ 81.63

SE (30/06/95) $217.944m