NETSCAPE'S INITIAL PUBLIC OFFERING - Valuation Sheet

Assumptions Case Questions

Risk Free Rate 6.71%
Since the media firms were among the largest stakes in the company, 11% from page 6, and since their
Equity Risk Premium 6.00% 1 contribution was 18 Million USD, we can conclude that they valued the company at 18M/0.11, being
Corporate tax rate 34.00% 163,636,363 USD
Ahares outstanding 33,001
2 From Exhibit 3, we can extract the following info for Microsoft: Shares outstanding: 627,000; P/E ratio: 39 and
Netscape's cost of equity 12.00% EPS 2.32. Accordingly the Market Value is: 2.32 x 39 x 627,000 = 56,730,960 USD
3 The principal reasons for going public were to fund expected future growth, to stockpile cash reserves for
potential acquisitions, and to gain visibility and credibility within the industry.
Growth rate (trial & error) 52.76%

Income Statement Calculations 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Revenues 17,321 26,459 40,417 61,739 94,309 144,062 220,062 336,156 513,495 784,390 1,198,194
Cost of Sales 1,801 2,752 4,203 6,421 9,808 14,982 22,886 34,960 53,404 81,577 124,612
Gross Profit 15,520 23,707 36,214 55,318 84,501 129,080 197,176 301,196 460,092 702,813 1,073,582
Operating Expenses 14,013 18,759 24,614 31,425 38,573 44,515 45,993 70,257 107,321 163,937 250,423
Operating Income 1,507 4,948 11,600 23,893 45,929 84,565 151,183 230,939 352,771 538,876 823,160
R&D Expenses 6,374 9,737 14,873 22,720 34,706 53,015 80,983 123,705 188,966 288,655 440,936
Income before tax (4,867) (4,789) (3,274) 1,173 11,223 31,550 70,200 107,234 163,805 250,220 382,224
Taxes - - - - - 10,545 23,868 36,459 55,694 85,075 129,956
NET INCOME (4,867) (4,789) (3,274) 1,173 11,223 21,004 46,332 70,774 108,111 165,145 252,268

Cumulative tax loss carry-forward (4,867) (9,656) (12,930) (11,757) (534) - - - - - -

Cash Flow Calculations 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Net Income (4,867) (4,789) (3,274) 1,173 11,223 21,004 46,332 70,774 108,111 165,145 252,268
Depreciation 953 1,455 2,223 3,396 5,187 7,923 12,103 18,489 28,242 43,141 65,901
Extrapolation for CAPEX
Capital Expenditures (7,933) (10,575) (13,796) (17,472) (21,188) (23,962) (23,767) (36,305) (55,457) (84,714) (129,405)
Cash Flow (11,848) (13,908) (14,847) (12,903) (4,778) 4,965 34,669 52,958 80,896 123,573 188,764 5.83%
Terminal Value (2005) 2,453,926
Disccounting Periods - 1 2 3 4 5 6 7 8 9 10
PV (1995) (11,848) (12,418) (11,836) (9,184) (3,037) 2,818 17,564 23,956 32,673 44,562 850,875

IPO Offering Price 28.00

Conclusion
Based on the above assumptions and simulating Cash Flows over the next 10 years, Netscape must grow at approximately 52.76% to justify a stock valuation of $28 per
share