NewsWire--AUGUST 15, 1995

TOPIC: Valuation, Initial Public Offerings

SOURCE: "Netscape's IPO Gets an Explosive Welcome," by Molly Baker and Joan E. Rigdon, The Wall Street Journal, August 9, 1995, C1; and "Netscape Must Turn Business Strategy Upside Down to Sustain Enthusiasm," by Joan E. Rigdon, The Wall Street Journal, August 11, 1995, A3.

SYNOPSIS: The articles discuss the recent IPO by Netscape Communications, an Internet server and World Wide Web browser company. Netscape's offering price jumped to $28 per share from it original filing price of $14. The stock opened at $71 on Wednesday, hit a high of $75, and closed at $58.75. Netscape, a fifteen-month old company, posted revenues of $16.6 million during the first half of 1995 and has never shown a profit.

DISCUSSION QUESTIONS:

1. Is the constant growth model, where the price of a stock is equal to its dividend divided by the required rate of return on the stock minus the constant growth rate, appropriate for valuing Netscape?

2. Assume that the current price of Netscape is $60 per share, that its required rate of return is 19 percent, that earnings will be 45 cents per share next year, that growth will be at a constant super-normal rate over the next five years and will then become a constant rate of 8 percent. What is the implied super-normal rate of growth for the next five years?

3. If the stock market is efficient, why is the price of Netscape so volatile around the IPO?