1. Does NeoSoft need to go public to satisfy its capital needs?

2. What sources other than the public equity market could be tapped to satisfy those needs? Consider the actual situation in your home market! Give a detailed explanation.

3. Can the recommended offering price of $28 per share for NeoSoft stock be justified? In valuing NeoSoft, you might find it helpful to use the following assumptions:

a. Total cost of revenues remains at 10.4% of total revenues;
b. R&D remains at 36.8% of total revenues;
c. Other operating expenses decline on a straight-line basis from 80.9% of revenues in 1995 to 20.9% of revenues in 2001; It stays constant afterwards. d. Capital expenditures decline from 45.8% of revenues in 1995 to 10.8% of revenues by 2001;
e. Depreciation is held constant at 5.5% of revenues;
f. Changes in net working capital of essentially zero;
g. Long-term steady-state growth of 4% annually after 2005; and
h. 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 NeoSoft grow on an annual basis over the next ten years to justify a $28 share value?

4. As an executive of NeoSoft, what would you recommend with respect to the proposed offering price? As an investor in NeoSoft, what would you recommend? As the manager of an institutional fund who was willing to buy and hold NeoSoft’s stock at the originally proposed price of $14 per share, would you be willing to buy and hold at an initial offering price of $28 per share?

The main question is: Can the recommended offering price of $28 per share for NeoSoft stock be justified?
To answer this question, you have to use the Goal Seek function (under Tools). To determine the annual growth rate of revenues (cell B35) that justifies the proposed share price ($ 28), you want to set the estimated market value of equity (cell B42) equal to the proposed market value (by changing cell B35).
You can use a "simplified" approach - use a growth rate between 2% and 8% and do calculation several times or use interpolation in order to find "the correct growth rate!

  
 

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Exhibit 1. Consolidated Income Statements for NeoSoft Communications Corporation Product revenues Service revenues Total Revenues Cost of Revenues: Cost of product revenues Cost of service revenues Total Cost of Revenues Gross profit Operating Expenses: Research and development Sales and marketing General and administrative Property rights agreement and related charges Total Operating Expenses Operating loss Interest income Interest expense Net loss Net loss per share Shares used in computing net loss per share Revenues, $ Inception (April 4 to December 31, 1994) 378,490 317,381 695,871 114,777 104,313 219,090 476,781 2,031,986 2,813,689 1,669,193 2,486,688 9,001,566 (8,524,775) 55,238 (308) (8,469,845) (0.26) 32,256,307 Six Months Ended June 30, 1995 15,580,258 1,045,133 16,625,391 1,222,045 513,767 1,735,812 14,889,579 6, 115,152 9,256,066 3,693,005 500,000 19,564,223 (4,674,644) 495,583 (128,655) (4,307,716) (0.13) 33,000,751 Exhibit 1. Consolidated Income Statements for NeoSoft Communications Corporation Product revenues Service revenues Total Revenues Cost of Revenues: Cost of product revenues Cost of service revenues Total Cost of Revenues Gross profit Operating Expenses: Research and development Sales and marketing General and administrative Property rights agreement and related charges Total Operating Expenses Operating loss Interest income Interest expense Net loss Net loss per share Shares used in computing net loss per share Revenues, $ Inception (April 4 to December 31, 1994) 378,490 317,381 695,871 114,777 104,313 219,090 476,781 2,031,986 2,813,689 1,669,193 2,486,688 9,001,566 (8,524,775) 55,238 (308) (8,469,845) (0.26) 32,256,307 Six Months Ended June 30, 1995 15,580,258 1,045,133 16,625,391 1,222,045 513,767 1,735,812 14,889,579 6, 115,152 9,256,066 3,693,005 500,000 19,564,223 (4,674,644) 495,583 (128,655) (4,307,716) (0.13) 33,000,751