Pricing of Rosetta Stone IPO-Assignment Solution

Pricing of Rosetta Stone IPO Purpose: The objective of this project is to integrate and apply some of the key materials and analytical tools we have been studying this term: financial modeling for early-stage companies, valuation using various approaches, adding uncertainty to the modeling via simulation, sensitivity, or scenario analysis, IPO pricing and costs.

Instructions: The spreadsheet modeling, excel work, statement of underlying assumptions, simulation or other models and output must be your own work.

Please submit a word document with the text responses to the items below.  Number each item and adhere to the page limit for each.  Prepare an Excel workbook of supporting analysis. Number the tabs in the workbook to correspond to the item numbers below.  If you need multiple tabs for an item, number them as, for example, Tab 1a, Tab 1b, Tab 2, etc. Each part is worth 10 points, 90 points total.  Make sure your explanations are clear and your Excel pages are clearly labeled and organized.

  1. Prepare a common size income statement for the years prior to the IPO (Excel). Discuss your findings. Do you see any evidence of scale economies or other factors that could affect your assumptions of future profitability or cash flow? (Maximum of 1/2 page of text, plus supporting Excel tab 1).                                                                                                         
  2. Construct the 2008 cash flow statement (Excel). What accounts for the increase in the company’s cash balance from 2007 to 2008? Note: For the operating cash flows portion of this, include all deferred taxes and all deferred revenue in your determination of operating cash flows and include the current portion of long-term debt in financing cash flows. Be careful not to double-count profit by also including it in the change in accumulated income. And be careful not to double count depreciation and amortization by not adjusting property and equipment and/or intangibles for changes due to depreciation and amortization. (Maximum 1 page explaining your analysis, plus supporting Excel Tab 2).


  1. Using the data in the case, including comparable data, estimate the WACC of Rosetta Stone and explain the assumptions you made for the risk-free rate, the market risk premium, the equity beta, and the marginal corporate tax rate. How did you use the comparable firm data in this analysis? (Maximum 1 page of text, plus Excel Tab 3).                                                       
  2. Using your estimate of WACC and the unlevered free cash flow projections in Exhibit 7A, prepare a discounted cash flow valuation for Rosetta Stone. Based on a discounted cash flow valuation, what do you expect to be the aftermarket value of the equity and the aftermarket price of the Rosetta Stone shares? What continuing value did you use in the DCF valuation and how did you determine it? (Maximum 1 page, plus Excel Tab 4).                                                                                                     
  3. .As an alternative to discounted cash flow, use the comparable firm data for EBITDA multiples to estimate aftermarket value and aftermarket price per share.  Explain your work. (Maximum 1 page, plus Excel Tab 5).                                                            
  4. Based on the EBITDA multiples of the comparable firms, use @Risk to assess the sensitivity of aftermarket value per share to uncertainty.  Explain your work (Maximum 1 page, plus Excel Tab 6).
  1. Based on your analysis in parts 4, 5, and 6, at what price would you recommend that the Rosetta Stone shares be sold? Explain your reasoning. (Maximum 1 page, plus Excel Tab 7).                                                                                                            
  2. Considering any planned underpricing of the offering, and adjusting for an underwriter discount (fee) of 7 percent of gross proceeds, what do you expect will be the Postmoney (aftermarket) value per share? How did you deal with the fact that about half of the shares are being sold by selling shareholders and will not increase shares outstanding or provide proceeds to Rosetta Stone? (Maximum 1 page, plus Excel Tab 8). (Note: Since selling at a discount to aftermarket value will dilute value per share, this price will probably be somewhat lower than the aftermarket value you estimated before the offering.)      
  3. Relative to your estimate of aftermarket value per share in part 8, what is the full cost of the IPO as a percent of aftermarket value per share?  What is the full cost as a percentage of the aftermarket value you estimated in part 4, 5, or 6, whichever you finally used in your IPO pricing? Explain. (1 page of text, plus Excel Tab 9).

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