Netscape Application Server Essay Example
Netscape Application Server Essay Example

Netscape Application Server Essay Example

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  • Pages: 2 (474 words)
  • Published: November 4, 2017
  • Type: Essay
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The Netscape Communications Corporation conducted an IPO on August 9, 1995. During this event, they released 5 million shares at $28 per share. The trading day was exceptional as the newly issued shares witnessed a significant increase in value, rising up to $73 by mid-day and closing at $54. This marked a nearly 100% increase in value on a single trading day. Going public is one option for fulfilling capital needs for Netscape, but there are alternative methods available. If Netscape decides to go public, it must estimate its capital requirements for the next three to five years.

The financing options for a company depend on several factors, such as asset characteristics, information asymmetry between insiders and outside investors, and the level and type of uncertainty regarding future returns. These options may include an angel investor, venture c


apital, bank loans or a strategic alliance. In addition to this, certain assumptions can be used to determine whether Netscape's proposed offering price of $28 per share is justified. These assumptions involve valuing the company based on total cost of revenues being 10.4% of total revenues, R remaining at 36.8% of total revenues and other operating expenses decreasing on a straight-line basis from 80.

Assuming a steady-state growth of 4% per annum after 2005, depreciation held constant at 5.5% of revenues and a long-term riskless interest rate of 6.715%, Netscape would have a ratio of operating income to revenues similar to Microsoft's at about 34%. From its current sales base of $16, the company's revenues increased from 9% in 1995 to 20.9% in 2001.

The difficulty in determining a just price for the Netscape offering stems from the lack of sufficien

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multiples analysis. This is due to both the shortage of genuine comparables for Netscape and the fact that negative earnings and operating cash flows were present during the time of the offering. However, utilizing a series of assumptions detailed in Exhibit 1N, it is estimated that Netscape must grow at an annual rate of roughly 55% over ten years to justify a share value of $28 while assuming a discount rate of 12%. As such, whether or not Netscape can attain this growth target will greatly impact its current value.

The growth rate projections suggest that Netscape will break even by 1998 and earn a total of $1.3 billion in revenues by 2005. Had the company maintained an annual growth rate of 71%, its first-day stock price of $73 would have been justified, resulting in revenues of $3.5 billion by 2005. Nonetheless, due to uncertainties surrounding Netscape's future performance, the assumptions made in the valuation model cannot be entirely relied upon.

The potential for growth is the primary value of Netscape, outweighing its current assets and cash flows. Investors who choose to invest in Netscape are essentially investing in the future of the internet industry, where success can be highly lucrative but also uncertain. A successful performance by Netscape could lead to significant prominence within the industry, possibly even challenging Microsoft's dominance.

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