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


There are various benefits of going public;for instance, the issuance of IPO can increase the market reach of the company.Going public can provide Rosetta Stone access to a wider pool of funds.Furthermore,the issuance of IPO will increase Rosetta’s confidence; 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 Rosetta can later invest funds raised through IPO in profitable projects. The IPO sometimes leads to an increased market share when Rosetta uses funds efficiently.

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

There are also some disadvantages in the form of under subscription; normally, companies like Rosetta that 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 can achieve their required target of funds, another disadvantage in going public is in form of expectations of investors, which in some cases are impractical and going public sometimes acts in bad interest of a company. The regulations of SECP and increased regulations over disclosures also act as a disadvantage when a 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. 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 whichever company goes public, could easily increase their gross profit in the 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 use 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 their present value. Moreover,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 conditions, which might take additional years to stabilize. 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 alongside 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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