Rosetta stone: Pricing the 2009 IPO Case Solution & Answer

Rosetta stone: Pricing the 2009 IPO Case Solution


Rosetta stone was set up by Allen Stoltzfus, in 1980. It is a language learning Software Organization. The Organization has been committed in establish brain fitness, education, and language software. Tom Adams, the CEO, and president of the organization has viewgoing public by contribution shares. Under the DCF method; the equity value of the company is estimated and the share price of the stock is 47.7. As the Organization is covering financial issues,the financial benefit in the shape of increasing the capital is a definite advantage. Therefore, providing liquidity to the keep going stakeholders’ i.e. clear and high worth which attracts talent and enhance the profile of the organization. Going public using an IPO would help the organization to improve brand realization and reliability among the public and it would allow the organization to access the capital markets and use that cash to additionally the business.

Problem Statement

In 2008, the company faced financial crises and in spring, there were signs of inspiration. The case is about the administration to decide on the initial public contribution of Rosetta stone stock, during the most challenging periods in the history of capital raising. Offering shares at a kind of lower price would allow the organization to fascinate more probable investors. The case has been designed to showcase the corporate valuation; using the deduction cash flow and the market. No record of the organization tends to add supplementary to the difficulty of shareholders as to whether to invest in IPO. Without any past track record; the choice of investing in IPO becomes tricky for shareholders.

 Common Sizing of Income Statement

The common size income statement is also called vertical analysis which is used to analyze the financial statement. The common size income statement is a kind of income statement where every item of the income statement is interpret with the percentage of the value of the company’s revenue. As Rosette Stone has financial data for more than one year, the company can analyze the development.  The common capacity of the organization income statement is in Display 1, which gives the percentage of each account of the income statement, based on its sales revenue. The common amount of the income statement is also aclarification of all accounts; based on Revenues and Expenses. The organization common amount shows that the gross profit margin for the five years is stable, but the operating margin is not that much good as it could be. The net profit margin is also not good as the organization is make a lower profit and has even collect significant losses in these five years. (For calculations, see Exhibit 1)

 Cash Flow Statement (2008)

The cash flow of Rosetta stone has calculated for the year 2008 only. This cash flow is positive for 2008 as 47428. In the calculation of the net worth, the cash flows of the organization are projected for the upcoming 10 years suppose no IPO revenue as well as new shares. This means that the organization is append to its cash reserves and is allowing it to reinvest in the future. This also states that the firm is paying to its shareholders as well. The cash flow statement compute how well the organization is supervise its cash position. It also means that the organization generates cash to pay its debts and finance its operational expenses. The operating activities of the company are showing positive amount as 28718, the investing activities show the amount of 2283, but this amount is negative, which shows that the organization has invested in purchasing of assets. And the financing activities are showing a negative amount of 1091. (For calculations, see Exhibit 2)

Weighted Average Cost of Capital

The WACC is the loaded average cost of capital. This is the calculation of the organization cost of capital with every category of capital. WACC for Rosetta stone is 3.52. All the sources of capital, including first-line stock, bonds, long term debts, and common stock.Benefaction shares at this price would check Rosetta from the risk of unaffordable and underpricing of the share as the weighted average cost of capital is used in the estimation of share price which signify the fair and practical share price. The weighted average cost of capital is calculated after converting the levered beta into unlevered beta. This rate means that the beta and the rate of return on equity increase because of an increase in the WACC. The supposition used for the cost of capital is that there is a symbolic impact on the cost of capital on the net present value or the enterprise value. In addition to this, the reason for the low and high valued trial with the low cost of capital is to assess and evaluate the impact of the changes in the weighted average cost of capital on the enterprise value of the organization and eventually, on the share price.(For calculations, see Exhibit 3)

 Discounted Cash Flow Statement

Along the core consideration of estimating the equity value of Rosetta before the IPO; the discounted cash flows of the expected cash flow are conducted. In the DCF method; the cash flows of the organization are predict for the upcoming 10 years, i.e. from 2009 to 2018,suppose no IPO revenue as well as new shares. The cash flows of the organization for the year are discounted back with the cost of capital of 0.071 percent. The higher the discount rate, the lower the present value of the cash flows for the period, and vice versa. Moreover, because of the high discount rate, the extensive the cash flows of the organization get discounted for the period, which in turn results in the lower net present worth. The incomes are projected utilizing the development pace of everything as well as other monetary information gave in Exhibit 8 of the case, for the following 10 years. Also, because of the absence of information with regarding to the depreciation uses, which are required to be incorporated in the calculation; the value of the devaluation is estimated by subtracting the ending balance of property, plant equipment from the opening balance, and additional capital expenditure incurred in the year. The discounted terminal value is 1179.0, enterprise value is 779.93, the market value of equity 774.27, and the share price from discounted cash flow is 47.7.(For calculations, see Exhibit 4)…………………………

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