Netscape Case

Before moving forward to compute the present value of these cash flows, a terminal value is required to forecast the long term value of the company after 5 years. . Following formula is used to calculate the terminal value.

6. As an executive of Netscape, what would you recommend with respect to the proposed offering price? As an investor in Netscape, what would you recommend? AS a manager of an institutional fund who is willing to buy and hold Netscape’s stock at the originally proposed price of $14 per share, would you be willing to buy and hold at an initial offer price of $28.

The name was later changed to Netscape Communications Corporation when the University of Illinois (which owned the trademark on the name Mosaic) threatened legal action. Netscape can be considered an advocate for the dot com era. They were not the first internet start-up, but they were the only one that mattered. Netscape produced Netscape Navigator which went on to become its first widely popular internet application. Netscape Navigator became really popular after the launch of the World Wide Web. Netscape Navigator introduced millions to the web. SSL, Java, JavaScript, open APIs and support for online media were innovations that Netscape Navigator made relevant. The next best thing of Netscape was the Netscape IPO. It helped launch the internet era that we are currently living in. It is thought that Netscape was born in Silicon Valley, but actually it was in Champaign Urbana, Illinois at the University of Illinois. It all started with a bunch of young programmers and software developers hanging out in a basement. The group was called the software development group. These programmers and software developers were working for barely above minimum wage at the National Center for Supercomputing Applications (NCSA). Aleks Totic and Jon Mittelhauser were a part of the group. Totic went on to develop Mac versions of both Mosaic and Netscape Navigator and Mittelhauser went on to develop the Windows

in our calculations, as this company exhibited dramatic value differences to others in the sample, (likely to skew our results and prove misleading). Using the average of the revised sample field for each ratio, we inserted Torrington’s values where appropriate to generate an entity value. The findings generated two values for Torrington, 606 million and 398 million. Taking the average of these two numbers, Torrington exhibited a relative value of 502.41 million. Because of the lack of related information given in the case, and the often large differences in measures amongst competitors, different capital structures, internal management strategies, there remained many unknowns in our model. We decided it would be best to use this valuation to reaffirm our assumptions in our DCF valuation. (Please see exhibits)

First, Microsoft ‘encouraged’ Compaq, Apple, and other computer manufacturers to promote only Internet Explorer, and to make that the default browser on their PC. This encouragement came in the way of threats to eliminate or delay licensing of operating systems, providing the browser for free to internet access providers, and bundling the software with the operating system under the guise of interactive ease for the consumer. This manipulation led to an increase in the browser’s sales by 45 to 50%, which paralleled the decline Netscape experienced in their market sales in 1998.6

Next, the terminal value at year ten was calculated. The following formula was used to do so: terminal value at year 10 = (FCF at year 11)/(WACC - g). This time we used the long-term growth rate of 7up, which was given by the case as 1% less than the industry rate. This resulted in a terminal value of $848M with its present value calculation being $231M.

* Compute the value with leverage, VL, by discounting the free cash flows of the investment using the WACC.

Solutions to Valuation Questions 1. Assume you expect a company’s net income to remain stable at $1,100 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company’s β = 1.5, the market risk premium is 4% and the 20-30 year yield on risk free treasury bonds is 5%. Finally, assume the company has 1,000 shares of common stock outstanding. a. Use the CAPM to estimate the company’s equity cost of capital. • re = RF + β * (RM – RF) = 0.05 + 1.5 * 0.04 = 11% b. Compute the expected net distributions to stockholders for each future year. • D = NI – ΔCE = $1,100 – 0 = $1,100 c. Use the

After considering the operational improvements forecasted, we project Robertson’s free cash flows and compute the terminal value using the Gordon Growth Method; the implied share price is analyzed further in accordance to growth rate and discount rate.

company’s securities, both debt and equity. The WACC is important to calculate because it is a necessary

a. What are Q’s EPS and dividends next year? How will EPS and dividends grow in years 2, 3, 4, and 5 and subsequent years?

We valued the company using four different methods; Net Present Value, Internal Rate of Return, Modified Internal Rate of Return and Profitability Index. We began with the Net Present Value, or NPV, calculation. NPV values an investment’s profitability based on the projected future cash inflows and outflows of the investment, discounted back to present value using the WACC. The calculations for NPV are presented in Appendix 2. We started by separating cash inflows and outflows by each year. We used Bob Prescott’s estimates for the revenue per year and related operating costs of cost of goods sold as

It is determined that the company worth is $856,518 with a share price of $351.03 per value as per the discounting dividend cash flow valuation approach..In appraising the anticipated premerger performance of the company, the weighted average cost of capital is computed; the worth of the WACC for FVC is 9.2% as depicted in

2. What is MS’s pricing and distribution strategy for IE?  How does this compare to Netscape? Why would MS pursue this pricing strategy?

After find out the results the next step will allow to compute for the taxes, and establish the WACC for the whole company. The discount rate represented by the weighted average cost of capital (WACC) has an important factor in deciding the net present value (NPV) of a project. Calculating the NPV is an important task since it allows the investors to make proper investment decisions. Given that the NPV of a project is positive, then the project is profitable and should be taken, but if the project has a negative NPV, then the project should be rejected. In the evaluations of a project the investors are making an investment decision with the objective of maximizing shareholders wealth.