Business and Management
Submitted By oolly
Financial Theory and Policy
Case: Netscape’s IPO
Each group should type up and hand in answers to the following questions. Please include a cover sheet with the names of the group members. Please keep your answers brief and to the point.
1. Why, in general, do companies go public? What are the advantages and disadvantages of public ownership?
2. The case points out that the IPO market is sometimes characterized as a “hot issue” market, and that many IPOs are viewed in retrospect as having been “underpriced.” What might explain these phenomena? Should the Netscape board be concerned about underpricing? Why or why not?
3. 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%); ‧ Capital expenditures decline from 45.8% of revenues in 1995 to 10.8% of revenues by 2001 (again, close to Microsoft’s experience); ‧ Depreciation is held constant at 5.5% of revenues; ‧ Changes in net working capital of essentially zero; ‧ Long-term steady-state growth of 4% annually after 2005; and ‧ A long-term riskless interest rate of 6.71%.
Given these assumptions, and starting from its current sales base of $16.625 million, how fast must Netscape grow on an annual basis over the next ten years to justify a $28 share value?
4. 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…...