1. Can the recommended offer price of $28 per share for Netscape's stock be justified? In valuing Netscape, you might find it helpful to use the following assumptions: 1. Total cost of revenues remains at 10.4% of total revenues: 2. R&D remains at 36.8% of total revenues; 3. 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% 4. Capital; expenditures decline from 45.8% of revenues in 1995 to 10.8% of revenues by 2001 (also close to Microsoft's experience); 5. Depreciation is held constant at 5.5% of revenues; 6. Long-tem steady-state growth of 5% annually after 2005; and 7. A long-term riskless interest rate of 6.71% 2. Given these assumptions and starting from its current 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? Exhibit 1 Consolidated Income Statements for Netscape Communications Corporation Revenues: Product revenues Service revenues Total Revenues Cost of Revenues: Cost of product revenues Cost of service revenues Total Cost of Revenues Inception (April 4 to December 31, 1994) Six Months Ended June 30, 1995 $378,490 317,381 695,871 $15,580,258 1,045,133 16,625,391 114,777 104,313 219,090 1,222,045 513,767 1,735,812 476,781 14,889,579 Gross profit Operating Expenses: Research and development 2,031,986 6,115,152 Sales and marketing 2,813,689 9,256,066 General and administrative 1,669,193 3,693,005 Property rights agreement and related charges Total Operating Expenses 2,486,688 9,001,566 Operating loss. (8,524,775) Interest income Interest expense 55,238 (308) Net loss ($8,469,845) 500,000 19,564,223 (4,674,644) 495,583 (128,655) ($4,307,716) Net loss per share Shares used in computing net loss per share ($0.26) 32,256,307 ($0.13) 33,000,751