Final Project: Pricing of Rosetta Stone 2009 IPO
You will need to download the case from the Harvard Business School Publishing website:
Note: Please remember to download the supplementary material for important exhibits.
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 analysis by sensitivity or scenario analysis, IPO pricing and
Instructions: This is an individual project and you must turn in your work individually. The spreadsheet
modeling, excel work, statement of underlying assumptions, simulation or other models and output must
be your own work/generated by you. Prior to our last class session, you may confer with each other about
general approaches, assumptions, etc. After the last class session, you are expected to work
Due: June 10 by 11:59 PM. Since this is the end of finals week there can be no exceptions. Late work will
not be accepted. Early submissions are welcome!
Make sure your work is well-organized and clearly explained. Please submit a word document with the
text responses to the items below. Number each item and adhere to the page limit (single space) 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, 80 points total.
1. Working independently, 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. Working independently, construct the 2008 cash flow statement (Excel). What accounts for the
increase in the companys cash balance from 2007 to 2008? Note: For the
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 . 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 1/2
page explaining your analysis, plus supporting Excel Tab 2).
3. Using the data in the case, including comparables data, estimate the WACC of Rosetta Stone and
explain the assumptions you made for the , 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 1/2 page of text, plus Excel Tab 3).
4. Using your estimate of WACC and the unlevered free cash flow projections, prepare a discounted
cash flow valuation for Rosetta Stone. Based on a 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).
5. 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).
6. Based on your analysis in parts 4, and 5 at what price would you recommend that the Rosetta
Stone shares be sold? Explain your reasoning. (Maximum 1/2 page, plus Excel Tab 6).
7. 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 1/2 page, plus Excel Tab 7). (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.)
8. Relative to your estimate of aftermarket value per share in part 7, 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, or 5 6, whichever you finally used in your IPO pricing?
Explain. (1/2 page of text, plus Excel Tab 8).
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