4224 words 17 pages
ROSETTA STONE: pricing the 2009 IPO Teaching Note

This case examines the April 2009 decision of Rosetta Stone management to price the initial public offering of Rosetta Stone stock during one of the most difficult periods in capital-raising history. The case outlines Rosetta Stone’s unique language-learning strategy and its associated strong financial performance. Students are invited to value the stock and take a position on whether the current $15 to $17 per share filing range is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. The epilogue details the 40% first-day rise in Rosetta Stone stock from the $18 offer price. With this
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This question invites students to explore the Rosetta Stone business model, its competitive strengths, and its potential to sustain a strong growth and profitability trajectory. Case Exhibit 6 can be a useful exhibit in highlighting the financial performance of the business. Typically students agree that Rosetta Stone is a very interesting business with strong potential for investors to participate in attractive financial upside potential.

3. What do you think the current market price is for Rosetta Stone shares?

Poll the class for their best-guess estimates of the market price of Rosetta Stone shares. Ask for an explanation for the variation in estimates. Draw out the observation that there is a substantial amount of uncertainty with valuing start-up businesses. The variation in class estimates is likely due to differences in judgment across the class as well as some possible technical errors in the valuations. Emphasize that, although there are no doubt many sound estimates, there are also substantial opportunities for error. An important objective of the discussion is to identify the sources of variation. Briefly review on the board the different parameters used by representative students in a discounted cash flow-based and a market multiples-based valuation.

4. The market-multiples approach seems easy. What are the pros and cons of using a market-multiples approach in valuation?

Have one of the students highlight the mechanics of a


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