[For the next five questions] Netscapes 1997 and 1998 financial statements are attached to the exam. Assume that Netscapes nominal required rate of return is 12%, the real risk free rate is 1.9417%, and inflation is 3%. All the numbers in this question are expressed in thousand dollars. Netscapes 1999 net income is $5,000 and its free cash flow is $20,000. At the end of 1999, you try to value Netscape. You estimated that for the next 2 years (2000-2001), free cash flow (excluding the depreciation tax shield) is expected to grow at 20% real rate, then drop to a real rate of 10% for 3 years after that, and then stabilize to a real growth rate of 4% in long term. You are certain of the depreciation: starting 1998, depreciation will grow at a nominal rate of 1.5% forever. Cash flows are assumed to be spread out evenly over the course of the year. The market value of Netscapes debt in 1999 is $550. 21) What is the real, risky rate of return?

22) What is the nominal risk free rate of return? 23) What is the depreciation tax shield in 2000? 24) What is the real terminal value of Netscape at the end of 2004? 25) Calculate the present value of Netscape based on your projections. Netscape ($ thousand) 1997 1998 Chg from 1997 to 1998 (% Sales) Balance Sheet Cash 184,598 177,483 (7,115) 39.6% Receivables 153,191 164,892 11,701 36.8% Other Current Assets 57,297 64,305 7,008 14.4% Total Current Assets 406,680 Property, Plant and Equipment 189,774 244,280 54,506 54.6% Accumulated Depreciation 58,681 99,394 22.2% Net PP&E 144,886 Investments 76,698 89,169 12,471 19.9% Intangibles - 76,149 76,149 17.0% Other Assets 29,943 20,731 (9,212) 4.6% Total Assets 737,615 Payables 40,081 50,214 10,133 11.2% Accrued Expenses 54,055 62,957 8,902 14.1% Taxes Payable 2,709 - (2,709) 0.0% Other Current Liabilities 106,170 148,582 42,412 33.2% Debt due in one year 535 - (535) 0.0% Total Current Liabilities 261,753 Long-term Debt 215 420 205 0.1% Common Stock 578,546 129.2% Retained Earnings (103,104) -23.0% Total Equity and Liabilities 737,615 Income Statement Sales (Net) 447,809 100.0% COGS 76,914 17.2% SG&A 378,957 84.6% Operating Income (8,062) Depreciation & Amortization 54,874 12.3% Interest Expense 99 0.0% Non-Operating Income 2,948 0.7% Pretax Income (60,087) Taxes (30%) -

Net Income (60,087) -13.4% Dividends - Number of shares outstanding 15,000