In the process of raising capital by issuing stock to the public a crucial moment is to determine the company’s share price that best reflects the real value of the company. In our analysis in order to estimate the fair value of Netscape’s share price we have applied the Weighted Average Cost of Capital Method of Valuation. The WACC method implies that the firm’s weighted average cost of capital represents the average return that the company must pay to its investors, both debt and equity holders, on after tax basis. We assume that the company maintains constant Debt/Equity ratio and the WACC remains constant all the time.
We first calculate the WACC by the formula:
re = rf + β(rm – rf) = 6.71% + 0.73 x 6% = 11.09%
Equity = 16,474,521
Debt/Equity = 0.18
Debt = 2,965,414
Interest Expenses = 128,655
We have used the company’s debt/equity ratio to calculate the amount of debt and after that we estimate company’s cost of debt (rd) using the interest expenses as part of the total amount of the debt.
rd = 128,655x2 / 2,965,414 = 8.68%
Tax rate = 34%
WACC = 16,474,521/(16,474,521+2,965,414) x 11.09% + 2,965,414/(16,474,521+2,965,414) x 8.68% x (1-34%)
WACC = 10.3%
Thus estimated WACC including the tax benefits from the shield is subsequently used to discount company’s free cash flows (FCF).
Numerous assumptions are set in the process of calculating Netscape’s free cash flows.
First we make a forecast about Netscape’s revenue growth for the entire period from 1995 to 2005 as we have based our assumption on the specific characteristic of the industry, company’s product and competitors. The internet industry where Netscape are settled their operation, has been gaining power every year since its birth in 1960’s as in about the mid – 1995 it is a broad sector, with a significant consumer base and strong potential for further growth in the future. The main product of the company -...