Georgii Meshcheriakov 0939950 Marina Poluianova 0986821 Maksym Malovichko 0986794 Loc Minh guyen 0948398 !a"eryna #ylova 0986764
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Netscape has a leading position in quickly growing IT-industry. IT-industry. Its strategy, strategy, “give away today, make money tomorrow”, has lead to a negative bottom line. I! was chosen as remedy to the "unding problem and the lead underwriters suggested changing the o""ering price "rom #$% to #&' per share. The aim o" the analysis is to determ determine ine whethe whetherr such such a change change is appropr appropriat iatee given given potent potential ial risks risks and rewards. The discounted "uture cash "low analysis suggests stock value o" #().*$,
1
implying that, a price o" #&' per share is reasonable and should be approved by the +oard. .nalysis
+y o""ering the browser "ree o" charge "or the business-to-customer +& and selling server so"tware +usiness-to-+usiness +&+ the company has gained /01 o" the market. 2espite its "irst mover advantage stemming "rom the innovativeness and user-"riendliness brought by the “click-and-point” browser, Netscape3s position is rather "ragile and revenue growth is likely to gradually deteriorate in $**4-&))0. 5uick IT development and threat o" entry will not allow "or stable revenue growth g without additional investments in research and development 672 to bring new innovative solutions to the demanding market. There"ore, be"ore reaching the steady state, g is assumed to "ollow a pattern8 *01, ')1, /01, 4)1, 001, 0)1, (01, $01, $&1, '1 the analysis assumptions in the e9hibit $. :sing ;icroso"t as a benchmark, other operating e9penses and apital e9penditure<=> are assumed to decline to &)1 and $)1 o" revenue respectively in &))$. To see i" the new I! price suggested by the underwriter is reasonable a discounted cash "low 2? analysis was conducted. ?irst, Netscape3s cost o" capital @< /.'$1 was calculated e9hibit & using the cost o" equity "rom the <; model $$.)*1, cost o" debt calculated as ratio between interest e9penses and average &-year debt '.4*1 cost o" debt is close to '.'1 - lending interest rate o" the :A banks in $**0 which proves that the calculation is correct, debt and equity values "rom the balance sheet, and the ta9 rate (%1. Ne9t, total equity value was "ound as the sum o" net present value o" "ree cash "lows in the e9plicit "orecast period NB ?? and the discounted terminal value NB TB. The "irst one is calculated using the indirect method, discounting by @<. The second one is "ound using the key value driver "ormula assuming %1 perpetual growth rate "ollowing &))0 e9hibit ( provides all the calculations. Netscape market value o" equity is thus #$.$/0 billion implying a price per share o" #().*$. This provides evidence that increasing the price to #&' is reasonable.
2
This price #&' could also be obtained in a scenario where revenue growth was constant at appro9imately %(.4$1, which is highly unrealistic in a quickly changing environment o" so"tware industry. #$4$ million o" capital can be raised a"ter going on I!, e9cluding the underwriter "ees. This should allow Netscape to divert necessary cash to product development to retain its market share and grow revenues. Netscape needs # */0 mln to cover other operational e9penses over $) years $**0-&))0 and # $$.&/ mln as I! cost "ees to underwriters.
hii" 1 he analysis assum%"ions .ssum%"ions
ost o" revenues
$).%1 o" revenues
672
(4.'1 o" revenues
!ther operating e9penses
decline to &)1 o" revenues by &))$
apital e9penditures
decline to $)1 o" revenues by &))$
2epreciation
straight-line depreciation over $) years
hanges in Net @orking apital
)
Dong-term steady-state growth
%1 annually a"ter &))0
Erowth rate o" sales
*01, ')1 ,/01, 4)1, 001, 0)1 ,(01, $01,
3
$&1, '1 Dong-term risk-"ree rate
4./$1
Ta9 rate
(%1
6isk-premium
41
hii" 2 eigh"e' average cos" o ca%i"al calcula"ion .$$ calcula"ion
Dong-term risk-"ree rate
4./$1
6isk-premium
41
;arket beta
)./(
$os" o eui"y
11*09
Interest e9penses
# $&'400
# $%')440.0
$os" o 'e"
8*69
2ebt
# &4)044'&
=quity
# $4%/%0&$
Ta9 rate
(%1
.$$
7*81
4
hii" 3 ree cash lo an' "o"al value calcula"ion
5
