Business Case

businessnote should not exceed three pages of text (1,500 words using 12 point Times New Roman font) and may include up to three pages of exhibits. Please include the names of all the authors, with the lead author listed at the top. The note should be written in prose with point form uses sparingly and where appropriate. Please address it to the Board of Directors of Netscape Communications.

Please send the Excel spreadsheet with the submission of your note so that I can check it directly.

Questions:

1. (1 mark) Why are investors so excited about Netscape? What is its strategy? How will it eventually make money?

2. (1 mark) Discuss whether Netscape needs to go public to satisfy its capital needs. What would you estimate might be the magnitude of its capital needs over the next 3 to 5 years? What sources other than the public equity market could be tapped to satisfy these needs?

3. (5 marks) What growth rate must be assumed over the next ten years to justify the recommended offering price of $28 per share? Calculate the value per share of Netscape based on a discounted free cash flow analysis. Build your model using the Excel template provided. your forecast should cover the years 1996 to 2005 inclusive. Note that the figures entered for 1995 in this spreadsheet are taken from Exhibit 1, which reports data for the Six Months Ended June 30, 1995.

In valuing Netscape, use the following assumptions:

* Cost of goods sold is constant at 10.4% of sales.

* Research and development is constant at 36.8% of sales.

* Sales, general, administrative, (SG&A) declines on a straight-line basis from 65.4% of sales in 1996 to 15.4% of sales in 2001, and remain constant thereafter. This level is consistent with Microsoft's ratio of operating income to sales.

* Capital expenditures decline from 38.8% of sales in 1996 to 10.8% of sales by 2001, and remain constant thereafter. This level is again consistent with Microsoft's experience.

* Depreciation is constant at 5.5% of sales.

* Changes in net working capital are zero.

* Marginal tax rate is 34%. Note that any tax-loss carry-forwards can be used to reduce taxable income in subsequent years.

* Long-term steady-state growth rate is 4.0% after 2005

* Long-term riskless interest rate is 7.5%

* Implied credit spread on Netscape's debt is 5.0% above the riskless rate.

* Target debt-to