ROSETTA STONE: PRICING THE 2009 IPO Harvard Case Solution & Analysis


There are various benefits of going public such as the issuance of IPO can increase the market reach of company going public can provide Rosetta Stone excess to wider pool of funds, further the issuance of IPO will increase the confidence of Rosetta generally speaking investor show more confidence in listed companies. When facing any investment decision as compared to investing in private non-listed companies. The IPO also raise significant funds through investors and then Rosetta can invest that funds rose through IPO in profitable projects. The IPO sometimes leads to increase market share if Rosetta use funds efficiently.

Funds raised can be used in research and development department for innovation which can ultimately give Rosetta the competitive edge over its contemporary competitors.

There are also some disadvantages which are in the form of under subscription normally companies like Rosetta which are about to go public choose investment banks to underwrite shares and provide heavy fees to banks in case of any under subscription so that companies like Rosetta achieve their required target of funds, another disadvantage to go public is in form of expectations of investors which in some case are not practical and going public sometimes acts in bad interest of a company. The regulations of SECP and increase regulations over disclosures also act as disadvantage when company decides to go public.

By looking at this decision from the company’s perspective, it can be seen that due to the limited amount of capital available with the company there is a strong fear that it might be taken up by some other company so Mr. Adam strongly believes that with the help of IPO this issue could be resolved significantly. Despite the above mentioned disadvantages of going public, it would be beneficial for Rosetta Stone to go public which could also be seen from the exhibit 8 of the given case that whoever company goes public could easily increases their gross profit in their upcoming years.

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

According to the research, it can be seen that about 81% of the cases uses DCF valuation method since it considers the future aspects of the business by taking into account the different elements to compute the free cash flows for the company by forecasting the economic conditions as well. By computing the appropriate discount rate by considering the current capital structure of the company and the cost associated with those capitals, all the expected future cash flows are discounted back to its present value. Also the terminal value of the project is computed with the help of optimal terminal growth rate.

The forecasting period of 10 years is not appropriate to value the company because of the prevalent economic condition which might take additional years to stabilize the company. However, in computing the appropriate discount rate for the company, the costs of debt as well as the market risk premium are already given in the case to be 7.5% and 8.5% respectively, the beta and the risk-free rates of the company are computed to be 0.70 and 3.65% respectively. With the help of CAPM approach the cost of equity is computed to be 9.60%.

The weighted average cost of capital is computed by computing the weights of equity as well as debt in the capital structure. The terminal growth of the company is computed to be 4% which basically includes 2% for the real growth and 2% for the prevalent inflationary conditions in the country. In the year 2018, the terminal value for the company is computed to about $ 1154 million..............

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