200910 Financing Enterprises Assignment

FINANCING ENTERPRISE
INITIATIVE

TABLE OF CONTENTS
Rosetta Stone introduction...............................................................................................................3
1. Characteristics of Rosetta Stone's business model and its strategy....................................3
2. IPO process and its advantages as well as disadvantage....................................................4
3. Market-Multiples approach to identify range of prices for an IPO....................................7
4. Market-Multiple approach and its use for identifying fair value of shares........................7
5 Reasonable rate of return for Rosetta Stone shares .........................................................10
6 Cash flow model and explanation on calculations...........................................................10
7 Offer price for IPO............................................................................................................12
REFERENCES..............................................................................................................................13
ILLUSTRATION INDEX
Illustration 1: Average of EV/EBITDA for 2008............................................................................8
Illustration 2: Average of EV/EBITDA for 2009...........................................................................8
Illustration 3: PE ratio for 2008.......................................................................................................8
Illustration 4: PE ratio for 2009.......................................................................................................9
Illustration 5: Valuation of shares....................................................................................................9
Illustration 6: Value of share............................................................................................................9
Illustration 7: Required rate of return............................................................................................10
Illustration 8: Calculation of cost of equity...................................................................................10
Illustration 9: Calculation of Enterprise value...............................................................................10
Illustration 10: WACC calculation................................................................................................10
Illustration 11: Calculation of cash flows......................................................................................11
Illustration 12: Computation of present value...............................................................................11
Illustration 13: Calculation of equity value...................................................................................11
Illustration 14: Calculation of intrinsic value of shares.................................................................12

Rosetta Stone introduction
Rosetta Stone is the firm that is across the globe for developing software's by using which
one can easily learn programming languages. Firm wants to bring its IPO in the market to raise
funds that will be used to make heavy investment in the business. In order to determine fair value
of share to determine offer price some specific methods like discounted cash flow and multiple
method are used in the report. At end of the report working notes are enclosed in image format
and briefly same are discussed.
1. Characteristics of Rosetta Stone's business model and its strategy
In current time period there is heavy demand of the experts that have expertise in specific
programming language. In this regard there are several websites where students visit and lean
new things. Rosetta stone develop its own software's by using which one can easily learn
programming languages. Firm is making available programming language related solutions to
the students and those who intends to learn programming language. With passage of time firm is
adding many new things in its software's or it can be said that it bring updates on same with
passage of specific duration. Rosetta stone understand that competition is fierce and it is very
important to remain in the market. Hence, it is focusing on eliminating its competitors and in this
regard in past years it purchase many firms. Some of the firms that are acquired by the Rosetta
stone are Tell Me More and Livemocha etc (Cullinan and Zheng, 2014). The main advantage of
merger and acquisition is that through this firm is able to get access to infrastructure that belong
to other company. Firms does not need to spend time on developing its own infrastructure of
technology base. It can be said that merger and acquisition that are done by the firms to great
extent helps firm in increasing its business size. Rosetta stone have individual customer's and
business customer's and according to there needs to develop its products. Company is paying
due attention on developing its core competency because it is a thing that provide edge to the
firm over its competitors. Firm is focusing on developing a workforce that is highly competent
and in this regard it is hiring talented candidates as its employees. The main thing that company
is doing is that it is not dependent on single product line in order to earn profit (Bricker and
Chandar, 2012). It can be said that firm is offering multiple products to meet the needs of
customer's. Presently, in its product portfolio there are products that meet needs of individuals,
business customers and government departments etc. it can be said that firm is focusing on same

type of product but in same it is offering different varieties to meet needs of different type of
people. Firm is focusing on innovating its existing product line and developing new features in
its product. It can be said that this is the thing that is differentiating firm from its competitors.
Rosetta stone makes investment on its research and development projects in order to enable itself
to add new features on its software. Firm understand that it needs to make heavy investment on
its project and on same time it is equal important to maintain profit in the business. Thus, it is
following cost control strategy in its business so as to elevate profitability in the business to
maximum level. In order to implement its cost control strategy firm is purchasing material in
optimum quantity and it is also following good cash management strategy in its business (Ayadi
and Wang, 2013). Gradually, Rosetta stone is shifting from its traditional product line and now it
is involved in developing varied sort of applications. This step will help firm is increasing its
customer's base. It can be said that this product line will to some extent reduce firm dependency
on traditional products.
2. IPO process and its advantages as well as disadvantage
There are many operations and process through which Rosetta stone needs to pass in order to
launch its IPO.SEC is the regulatory authority that looks after entire process of listing of shares
and launch of IPO. It laid down some important parameters or standard that firm which intends
to issue shares in the market needs to follow in order to issue shares. These standards are
determined in terms of profit that must be earn by the firm in number of years under specific
duration. There are many other parameters that an organisation need to pass in order to issue
IPO. Steps that company needs to follow in order to issue its shares are given below.
1. Creating pitch: It is well known fact that there are many steps that managers of an
organization needs to follow or comply with in order to issue shares. In this regard
management of the firm collect all required information and carry out detail discussion
reading preparation of plan that will be followed to complete all require formalities
(Fernández Gimeno and et.al., 2012). In this stage managers will undertake meeting with
the underwriters and will convince them to purchase shares in case they are not
subscribed partially by the public.
2. Kick-off meeting: After determining each and every thing managers of the Rosetta stone
will conduct meeting with the important entities that will play major role in in facilitating
operations related to launch of IPO in the market. Some of these entities are investment