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 companyΒs cash
balance from 2007 to 2008? Note: For
the operating cash flows 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 financing cash flows. 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 risk-free rate, 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 discounted cash flow 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).