Rosetta Stone Harvard Case Solution & Analysis

Rosetta Stone Case Study Solution

Valuation of Firm:

There have been two ways used to find the enterprise value and theoretical price of shares before an IPO and after an IPO. These two ways are the theoretical share price through earning per share and price to earnings ratio, and theoretical share price through enterprise value to EBITDA and market value of equity to total outstanding shares.

In first method, K 12 Incorporation price to earnings ratio for 2008 and 2009 have been taken which have been further used in calculation of theoretical share price by multiplying earning per share of Rosetta stone with K 12 Incorporation’s price to earnings ratio. Here the theoretical share price of Rosetta stone for the year 2008 is $ 31.25 while for the year 2009 is $ 57.62.

In second method, K 12 Incorporation enterprise value to earnings before interest, income taxes and depreciation and amortization expenses have been used to calculate theoretical enterprise value of Rosetta stone by multiplying earnings before interest, income taxes and depreciation and amortization expenses by EV / EBITDA ratio of K12 Incorporation. Market value of Rosetta stone equity has been found through deduction of long term debt form Rosetta stone theoretical enterprise value. By dividing the market value of equity to total outstanding shares, the theoretical share price of Rosetta stone for the year of 2008 and 2009 are $ 22.54 and $13.92 respectively. By this, theoretical share price ranges from $ 13.92 to $ 57.62, after an IPO while before an IPO this range was $ 22.54 to $ 31.25.

Exhibit 1: Cost of Capital

Levered Beta
Comparable firms Beta
Career Education Corporation 0.75
Capella Education Company 0.7
Average Levered Beta 0.73
Total debt to equity ratio 12.53%
Unlevered Beta 0.67
Risk free rate 2.76%
Market Risk Premium 6%
Cost of Equity / Cost of Capital 6.8%

Exhibit 2: Theoretical Share Price through P/E Ratio

2008 2009
K12's P/E ratio                       18.30                       35.40
EBIT (in millions)                       29.36                       38.15
Outstanding Shares (in millions)                       17.19                       23.44
Rosetta's EPS                         1.71                         1.63
Theoretical Share Price                       31.25                       57.62

Exhibit 3: Theoretical Share Price through EV/EBITDA Ratio

2008 2009
K12's EV/EBITDA                       13.40                         8.70
Rosetta's EBITDA            29,356,000            38,153,160
Theoretical Enterprise Value          393,370,400          331,932,492
Less: Rosetta's Long Term Debt               5,660,000               5,660,000
Market Value of Equity          387,710,400          326,272,492
Outstanding Shares            17,200,000            23,439,500
Theoretical Share Price                       22.54                       13.92

 

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