Netscape Navigator - Assignment Example

1. Netscape Navigator which is the company's most outstanding product enables users to exchange information and electronic commerce (E-Commerce) on the internet. The navigator that has a user-friendly interface enables users to navigate the internet by manipulating icons and windows instead of using text commands. Moreover Netscape's navigator provides other functions of the internet such as web browser, file transfers, news group communications and e-mail. For the quarters ended March 1995 and June 30, the navigator generated 49% and 69% respectively of the total revenue.

Further more the navigator provided supplementary functions to other business and non business enterprises such as the provision of website space on the internet, place on the web where web browsers could visit, integrated application software programs to harmonize huge business transactions via internet and other full scale electronic commerce through seamless applications. Netscape's strategy was to set a new industry standard and to make money by creating a program that would destroy Mosaic which had 60% of the web browser market.

The rival product was later named Mozilla and then renamed Netscape Navigator at the end of 1994. Netscape faced competition form PC and UNIX software vendors and on-line service providers which where practically new entrants in the web browser, server and service markets especially as the internet and its demand increased in a rapid pace. Microsoft was also one of Netscape's strongest competitors in the long run because in 1995 Microsoft released Windows 95 operating system which included a rival browser that was created from spyglass code.

The Microsoft browser is very efficient and allows Windows users to access Microsoft Network, the company's proprietary on-line service and broader Internet network access. 2. Netscape needed to raise money through initial public offering in 1995 because she needed to fund expected future growth, stockpile cash reserves for prospective acquisitions and also to acquire a better reputation and credibility within the industrial communication and technology industry. Going public was certainly one means of Netscape to source for new capital. 3. The advantages of going public arises the equity capital needs to increase to the point where the opportunity cost of remaining private and compensating investors for the lack of liquidity becomes to great relative to the lower cost of capital derived from liquid public markets.

The disadvantages of going public involve the associated costs of being a publicly traded company and also the costs associated with the initial public offering. 4. Establishing a fair price for the offering of 28% is very difficult. There is not much to calculate as far multiples analysis is concerned. There are few true comparables to Netscape and strictly speaking Netscape had negative earnings and operating cash flows at the time of the offering. 5. Buying Netscape at 28% per share might be risky this because using the valuation model to access its financial performance, might not give a true picture of Netscape's financial performance because of uncertainty surrounding Netscape's future performance.

Netscape's value is seen most probable in the growth options that it possesses not in the cash flows arising from its assets. Buying Netscape's stock is similar to buy an option on the web industry. There is so much uncertainty even though there positive aspects of its financial performance outweigh its negative aspects. Cash Flow Valuation for Netscape ACTUAL FORECAST 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Revenues 16,625 25,790 40,007 62,061 92,272 149,342 231,666 359,372 557,476 864,785 1,341,497 Cost of goods sold 1,731 2,693 4,177 10,051 10,051 15,592 24,188 37,521 58,205 90,290 140,062 Gross profit 14,890 23,097 35,830 55,581 86,220 133,749 207,478 321,851 499,271 774,495 1,201,435 R&D 6,115 9,486 14,715 22,827 35,411 54,931 85,211 132,184 205,051 318,085 493,430 Other operating expense 13,449 18,284 24,362 31,585 39,370 46,138 48,405 75,088 116,481 180,691 280,297 Operating income (4,675) (4,672) (3,247) 1,169 11,440 32,680 73,862 114,579 177,739 275,719 427,708 Taxes 0 0 0 0 5 11,111 25,113 38,957 60,431 93,744 145,421 Net income (4,675) (4,672) (3,247) 1,169 11,435 21,569 48,749 75,622 117,308 181,975 282,287 Cumulative tax loss (4,675) (9,347) (12,594) (11,426) 0 0 0 0 0 0 0 Capital expenditure 7,618 10,012 12,731 15,404 17,157 16,161 25,070 38,889 60,327 93,582 145,170 Depreciation 918 1,424 2,209 3,427 5,316 8,246 12,792 19,843 30,782 47,751 74,073 Free cash flows (11,375) (13,260) (13,769) (10,809) (406) 13,654 36,471 56,576 87,763 136,144 211,190 Terminal value Source: (http://www.brainmass.com/homework-help/business/finance/21019) Assumptions Riskless rate 6.

71% Current shares outstanding 32,764 Discount rate 12.00% New shares 5,000 TV growth rate 4.00% Total shares 37,764 Changes in NWC 0.00% Value per share $28.00 PV of cash flows $173,587 Cost of revenues 10.4% of sales PV of Terminal $883,971 R&D 36.8% of revenues Total PV $1,057,558 Other operating expenses Decline to 20.9% of sales by 2001 Capital expenditures Decline to 45.8% of revenues by 2001 Depreciation 5.5% of revenues . Reference: (http://www.brainmass.

com/homework-help/business/finance/21019)