Rosetta stone: Pricing the 2009 IPO Harvard Case Solution & Analysis

Rosetta stone: Pricing the 2009 IPO Case Solution

 Share Price

To approximate the equity value and the share price of the organization before issuing an IPO; the comparable method is used. The management of Rosette has evaluated a share value from $15 to $17 per share which is shown in Exhibit 7 of the case. The factors which hold reasonable importance in the decision of the enterprise value and the share price includes the cost of the capital and revenues of the organization for the time. The price to earnings ratio of K12 Inc. for the year 2008, is used to estimate the share price of Rosetta by multiplying the EPS of Rosetta with the P/E ratio of K12, hence resulting in $31.25. The market value of Rosetta is estimated by adding the long term debt from EV of Rosetta. The share price from Discounted Cash Flow is calculated by dividing the market value of equity by outstanding shares. The share price from Discounted Cash Flow is 45, whereas, the market comparison is 29.5. (For calculations, see Exhibit 5)

Recommendation of Share Price

Share prices are calculated with two valuation methods. The Discounted cash flow is a method to determine the value of an investment for the future. It also helps to determine the worth of the investment today based on the return of the future. The discounted cash flows give an accurate share price for the company in the market. Due to the economic downturn, the willingness of investors to purchase shares is somewhat affected as they are no longer interested in purchasing shares at relatively high prices due to the market unpredictability. So it is recommended to go with DFC calculated share price. The discounted cash flow is a common way to value the entire organization and the valuation of its stock. Discounted cash flows give the share value as 47.7, which is higher than 29.5 from other share valuation price.

Post Money Valuation

Post-money valuation is estimated worth of the company after outside financing or capital investment which is added to the organization balance sheet. Post- money value is equal to the pre-money value by adding new equity from outside investors. Taking into consideration the underpricing of the offering as well as the adjusting for the underwriter’s discount of 7 percent of the gross proceeds; it is expected that the post-money value per share would be $41.85, which is calculated by multiplying the share price with the underwriter’s discount of 7 percent and then deducted from the share price. What's more, selling of whole offers to the investors will in general give continues to the organization. As half of the portions of the organization would be new offers and the other half would be offered to the current investors, which thus would not expand the offers remarkable because of which, the organization could offer the new offers to raise the capital. It could be offered to the current investors of the organization, concerning their present property. (For calculations, see Exhibit 6)

Cost as a Percentage of Aftermarket Value

The Initial Public Offering means the process of offering the shares of an organization to the public in a new stock issuance. It allows anorganization to raise its capital from public investors. It also allows public investors to participate in the new public offering. Going public using an IPO would help the organization to improve brand awareness and credibility among the public and it would allow the organization to access the capital markets and use that cash to further the business. In doing so, the organization would be able to increase the investor base and exploit the large financing opportunities. The IPO takes anywhere from 6 to 9 months or even longer, during that period the management team of the organization is most likely focusing on the IPO, which in turn could cause other areas of the business to suffer.Concerning the estimate of the aftermarket value per share calculated in question 7, the full cost of the IPO as a percentage of the aftermarket value per share is calculated by deducting the issuer’s net. In addition to this, the cost of IPO as a percentage of the aftermarket value per share is calculated by dividing the total cost per share issued by the issuer’s net: representing the cost of IPO as a percentage of the aftermarket value per share.

The full cost as a percentage of the aftermarket value is calculated for the recommended price of 45 dollars, due to the future related performance of the shares in the market, fueled by the high growth earnings and positive cash flows. Also, the pre-money value per share tends to be calculated by multiplying the total number of outstanding shares with the total cost per share issues, hence resulting in the pre-money value of 32400000 dollars.(For calculations, see Exhibit 7)


Exhibit 1: Common Sizing of IS

Rosetta Stone Common Sizing
Income Statement (in thousands of dollars)
  2004 2005 2006 2007 2008
Revenue 100% 100% 100% 100% 100%
Cost of revenue 16% 17% 14% 15% 14%
Gross profit 84% 83% 86% 85% 86%
Operating expenses:          
Sales and marketing 45% 46% 51% 48% 45%
Research and development 7% 6% 9% 9% 9%
Acquired in-process research and development 0% 0% 14% 0% 0%
General and administrative 26% 17% 18% 22% 19%
Lease abandonment 0% 0% 0% 0% 1%
Transaction-related expenses 0% 0% 11% 0% 0%
Total operating expenses 77% 69% 103% 79% 73%
Income from operations 7% 14% -17% 6% 13%
Other income and expense:          
Interest income 0% 0% 1% 0% 0%
Interest expense 0% 0% -2% -1% 0%
Other income 0% 0% 0% 0% 0%
Interest and other income (expense), net 1% 0% -1% 0% 0%
Income before income taxes 8% 14% -18% 6% 13%
Income tax expense (benefit) 0% 0% -1% 4% 6%
Net income 8% 14% -17% 2% 7%
Preferred stock accretion 0% 0% 0% 0% 0%
Net income to common stockholders 8% 14% -17% 2% 7%


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