Part I

Consider the merger of AOL and Times Warner. The merger was justified as a win for both companies. Earlier combinations of content providers with entertainment distributors faced difficulties. The question of economic benefit of such mergers was answered in 2000, with the dotcom meltdown. In 2002, the merged company wrote-down $50B of the $130B in goodwill. If you believed that the full goodwill should be written down, how would you adjust the reported financial statements? (tax rate is 30%)

Part II

Consider APEX Inc. which leases equipment worth $10M and a useful life of 10 years, with the following terms: - Lease term 5 years - Annual lease payments (assume end of year) $2.5M - Interest rate on the lease 8% per annum - APEX has the option to purchase the equipment at the end of the lease for $1 Apex records the lease as an operating lease because it wants to reduce its debt to equity ratio.

If you believed that the lease is finance lease, how would you adjust the reported financial statements? (tax rate is 30%)

Part III

Microstrategy, a software company, recognizes revenue from the sale of licenses after execution of the licensing agreement and shipment of the product.. If you were concerned about Microstrategys booking of two contracts worth $30M as revenue when the contracts were not executed until after the year end, how would you adjust the reported financial statements, if cost of sales as a percent of revenue was 5%? (Microstrategys tax rate is 30%)

Part IV

If you believed that inventory is overstated by $25M (tax rate is 20%), how would you adjust the reported financial statements?