Rosetta Stone Case Study Solution
Valuation of Firm:
There have been two ways used to find the enterprise value and theoretical price of shares before an IPO and after an IPO. These two ways are the theoretical share price through earning per share and price to earnings ratio, and theoretical share price through enterprise value to EBITDA and market value of equity to total outstanding shares.
In first method, K 12 Incorporation price to earnings ratio for 2008 and 2009 have been taken which have been further used in calculation of theoretical share price by multiplying earning per share of Rosetta stone with K 12 Incorporation’s price to earnings ratio. Here the theoretical share price of Rosetta stone for the year 2008 is $ 31.25 while for the year 2009 is $ 57.62.
In second method, K 12 Incorporation enterprise value to earnings before interest, income taxes and depreciation and amortization expenses have been used to calculate theoretical enterprise value of Rosetta stone by multiplying earnings before interest, income taxes and depreciation and amortization expenses by EV / EBITDA ratio of K12 Incorporation. Market value of Rosetta stone equity has been found through deduction of long term debt form Rosetta stone theoretical enterprise value. By dividing the market value of equity to total outstanding shares, the theoretical share price of Rosetta stone for the year of 2008 and 2009 are $ 22.54 and $13.92 respectively. By this, theoretical share price ranges from $ 13.92 to $ 57.62, after an IPO while before an IPO this range was $ 22.54 to $ 31.25.
Exhibit 1: Cost of Capital
| Levered Beta | |
| Comparable firms | Beta |
| Career Education Corporation | 0.75 |
| Capella Education Company | 0.7 |
| Average Levered Beta | 0.73 |
| Total debt to equity ratio | 12.53% |
| Unlevered Beta | 0.67 |
| Risk free rate | 2.76% |
| Market Risk Premium | 6% |
| Cost of Equity / Cost of Capital | 6.8% |
Exhibit 2: Theoretical Share Price through P/E Ratio
| 2008 | 2009 | |
| K12's P/E ratio | 18.30 | 35.40 |
| EBIT (in millions) | 29.36 | 38.15 |
| Outstanding Shares (in millions) | 17.19 | 23.44 |
| Rosetta's EPS | 1.71 | 1.63 |
| Theoretical Share Price | 31.25 | 57.62 |
Exhibit 3: Theoretical Share Price through EV/EBITDA Ratio
| 2008 | 2009 | |
| K12's EV/EBITDA | 13.40 | 8.70 |
| Rosetta's EBITDA | 29,356,000 | 38,153,160 |
| Theoretical Enterprise Value | 393,370,400 | 331,932,492 |
| Less: Rosetta's Long Term Debt | 5,660,000 | 5,660,000 |
| Market Value of Equity | 387,710,400 | 326,272,492 |
| Outstanding Shares | 17,200,000 | 23,439,500 |
| Theoretical Share Price | 22.54 | 13.92 |
Related Case Solutions & Analyses:
Davids Bridal: Proposal for a New Generation
Prospective Student Visits to the Darden School: Process Improvement A
Performance Measurement with Factor Models
UpDown: Confidential Instructions for MICHAEL
Cocoa Petes Chocolate Adventures (Abridged)
Information System Strategy at Neelkanth Drugs
8 Reasons Sustainability Will Change Management (That You Never Thought of)
CDI (B): The Market for Digital Inclusion: Social, Commercial and Government Enterprise Models
eBay Partner Network (A)
Azzurri Communications
