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Introduction
On 9 August 1995, Netscape Communications Corporation went public with an IPO of 5 million
shares priced at $28 per share. In an extraordinary day of trading, the company's newly issued
shares soared to $73 by mid-day before closing at $54 - a nearly 100% increase in value in a single
day of trading.
1. Does the Netscape need to go public to satisfy its capital needs? What would you
estimate might be the magnitude of its capital needs over the next 3 to 5 years?
Going public is certainly one means of sourcing new capital, but there are alternatives. The optimal
source of capital depends upon a firm's asset characteristics, the nature of asymmetric information
that might exist between insiders and outside investors, and the degree and nature of the uncertainty
surrounding future returns. Possibilities include an angel, venture capital, bank loans and a strategic
alliance.
2. Can the recommended offering price of $28 per share for Netscape's stock be justified?
In valuing Netscape, you might find it helpful to use the following assumptions:
· Total cost of revenues remains at 10.4% of total revenues
· R&D remains at 36.8% of total revenues
· Other operating expenses decline on a straight-line basis from 80.9% of revenues in
1995 to 20.9% of revenues in 2001 (this would give Netscape a ratio of operating
income to revenues close to Microsoft's, which is about 34%)
· Depreciation is held constant of 5.5% of revenues
· Long-term steady-state growth of 4% annually after 2005
· A long-term riskless interest rate of 6.715
Given these assumptions, and starting from its current sales base of $16.625 million,
how fast must Netscape gro ...