ROSETTA STONE: PRICING THE 2009 IPO Case Solution & Answer


With the help of this discount rate the enterprise value of the company is taken to be $ 671.39 million. By subtracting the amount of debt and dividing the value with the outstanding shares of the company, per share value of the company is computed to be $ 38.45.

Qualitative as well as Quantitative Rationale of using multiple valuation method and their pros and cons with assumptions

 The first and the foremost benefit of using this method is that it is relatively very easy and less time consuming to derive at the value of the company. In addition to this, it is specially used in the circumstances when the firm is not the steady state and there is highly difficult to predict the future which is also fulfilling current conditions of Rosetta Stone. However, there are some disadvantages with this method which includes the wrong evaluation of the market with the help of different measures. In addition to this, the most typical issue is when the analyst does not select the appropriate comparables of his/her company which might end up with wrong evaluation. The method could be meaningless if the values of multiples are negative.

However, in the given case, the selected comparable companies include the Apollo Group, Capella, Devry, ITT, K12, Grand Canyon and New Oriental Education. The first and the foremost multiple use to value Rosetta Stone is EV/EBITDA, since it can be largely used for the capital-intensive companies and the other multiple used is Price/ EPS. These multiples could easily value the company using market based approach. By keeping their significant disadvantages in mind, the multiples are only used to compute the optimal IPO price for the firm.

By averaging the selected comparable data, the EV/EBITDA multiple is computed to about 16.16. By multiplying this with the EBITDA of Rosetta Stone, the enterprise value is computed to about $ 559 million, per share value of the company by dividing the equity value with the outstanding shares is computed to about $ 31.9.

However, by using the P/E multiple, the EPS of the company is first computed by dividing the net earnings attributable to the common shareholders with the total outstanding shares which comes out to be 0.808. By multiplying this value with the multiple of 24.02, the stock price of the company is computed to about $ 19.40.


In order to make some recommendation for the Rosetta stone stock price, the average of the three valuation techniques including the discounted cash flow technique and with the help of two multiple valuation techniques are taken. By average the three techniques, a recommended price for the company’s stock should $29.93 which should be acceptable for all the stakeholders of the company.

Comparison to the estimated market value per share

By comparing this price with the market value per share of the company, it can be seen that it is significantly under priced. Because the value as computed with the help of the different techniques reflects the intrinsic value of the company and the price that was prevailing is because of the economic conditions in the country which made it bit difficult to stabilize.

Comparison to the range estimated by management ($15-$17 per share)

The range estimated by the management is too low from the perspective of valuation done using the different criteria. The significant reason behind this under pricing is because of the informational asymmetry which can best be explained with the help of lemon theory. In addition to this, the other major factor for this issue is the conflict between the investment bankers which deliberately involved in this under pricing. However, the internal managerial conflicts are one other reason behind this issue……………..

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