Reference no: EM132752769
Can the recommended offering price of $28 per share for Netscape's stock be justified? In valuing Netscape, make 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 in 2001,
-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,
-Cost of capital of the firm is 12%. 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?
Please provide a detailed solution for this question. Thanks.