Stock Market Valuation with Real Options:: lessons from Netscape

Discounted cash flow is the main tool for valuing projects and companies. Real options techniques can augment valuation. The case of Netscape is used to demonstrate this. We begin with a defensive cash flow scenario. On top of this, we superimpose a number of real options valuations. Some experts would dispute our methodology because it is not built upon market-priced risk. Nonetheless, it provides an approximate valuation. We prefer equity valuation using various methodologies, including real options where appropriate, to arrive at a range of value. But we cannot, using financial logic, justify the high Netscape flotation price.