Valuation of Tehran Stock Exchange

This assignment explores the valuation of companies listed on the Tehran Stock Exchange. It examines key financial ratios such as EV/EBITDA, PE ratio, and uses valuation models like Discounted Cash Flow (DCF) to determine the intrinsic value of these firms. The analysis considers factors influencing company performance and utilizes illustrations to present calculations and results.

Financial entrepreneurial
initiatives

TABLE OF CONTENTS
Rosetta Stone..........................................................................................................................3
1. Describe the key features of Rosetta Stone's business model and its strategy...................3
2. Advantage and disadvantage of Rosetta stone undertaking an IPO...................................4
3. Market-Multiples approach to identify range of prices for an IPO....................................6
4. Market-Multiple approach and its use for identifying fair value of shares........................7
5 Reasonable rate of return for Rosetta Stone shares ...........................................................9
6 Cash flow model and explanation on calculations...........................................................10
REFERENCES..............................................................................................................................13
ILLUSTRATION INDEX
Illustration 1: Average of EV/EBITDA for 2008............................................................................7
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: Required rate of return..............................................................................................9
Illustration 7: CAPM Model..........................................................................................................10
Illustration 8: Projected income.....................................................................................................11
Illustration 9: Calculation of enterprise value................................................................................11
Illustration 10: Calculation of WACC...........................................................................................12
Illustration 11: Calculation of terminal value................................................................................12
Illustration 12: Calculation of equity value...................................................................................12
Illustration 13: Calculation of intrinsic value................................................................................12

Rosetta Stone
Rosetta Stone is the company that prepare language learning software and it is going to
launch its IPO in the market. In the report different methods of valuation like market multiple an
DCF model are prepared and on the basis of same offer price of firm shares is determined. In
end part of the report, all calculations are attached and explanation on same is given.
1. Describe the key features of Rosetta Stone's business model and its strategy
Rosseta stone's is following the has cloud-based business model and under this model
company is providing software's on which one can learn languages. It can be said that firm is
providing language learning solutions. On its software it is using innovative technology and time
to time upgrade its software so the one can learn language in better way. Mentioned firm in order
to expand its business purchase many firms like are Tell Me More and Livemocha etc. students
and professionals visit firm website to learn languages and it is major source of income for the
firm. These acquisitions helps firm in improving its competitive capability. There are many
corporate clients of the Rosseta stone and it have its own sales personnel who perform CRM
function for the firm. In order to expand business at rapid pace firm is focusing on developing
its core competency (Learn a new language now, 2016). In this regards it is selecting highly
skilled and talented person as employees It drive value by recruiting skilled and highly
experienced sales force. This is helping firm in making available content on languages in best
way. The one of the best thing that Rosseta stone have in its business is that it is not dependent
on single type of customer for earning revenue. Currently, its customer's segment comprises
students and professionals, governmental administered offices etc. In terms of product it can be
said that sale of new language and updated learning software's is the the main source of income
of the firm.
Its main strategy is to increase its competitiveness by preparing software in such a way
that give good learning experience to the stakeholders in terms of learning on its software's.
In order to implement this strategy firm is making heavy investment in its research and
development projects (Boulton and Campbell, 2016). In this regarding it is upgrading its
technology base. With passage of time it is making heavy investment in its research and
development projects. On same time it is also focusing on keeping stiff control on its
expenditures. In this regard, it is maintaining stiff control on material purchase, usage of money

and R&D projects cost. Firm is following specific strategy under which it is working on projects
that are different from its current product line. Like it is developing apps that are related to brain.
This will enhance customer's base of the firm and will generate new source of income. Hence, it
can be said that firm is focusing on multiple things to increase its business.
Porter five forces model of the business firm are as follows.
 Threat from new entrants- There is less threat from new entrants because in this industry
as per past trends very small number of firms enter in some previous years.
 Bargaining power of buyers- Buyers does not have any bargaining power as they lots of
alternatives are not available to them.
 Bargaining power of suppliers- Firm have bargaining power because it is giving
different and good experience to the people in terms of service quality.
 Threat from substitutes- Less threat from substitute products because firm is consistently
updating its technology base.
 Threat from rivals- There are few competitors in the industry. However, firm is receiving
tough competition from them. But it is capable to compete them. Hence, there is less
threat from rival firms.
Some of the elements like key markets, company growth and innovation underpin the
forecast of business growth and development. It can be seen that firm in a sector in which there
are lots of growth opportunities. This means that in future firm business will also grow. Hence, it
can be said that sector in which firm operate is growing then growth rate of same will also
accelerate. Innovation is another thing that differentiate firm from its competitors. Rosseta stone
is focusing on innovating its technology base which will lead to easy performance of operations
and reduction in cost. Hence, automatically this form a base of forecast that in future firm growth
rate will increase at rapid pace. In this factors like key markets, company growth and innovation
support the forecast of business growth and development.
2. Advantage and disadvantage of Rosseta stone undertaking an IPO
In order to issue IPO there is a regulatory authority from which it is necessary to take
permission. These authorities lay down some rules or parameters and those firms that wants to
launch there IPO needs to pass these parameters in order to launch IPO. These criteria are

determined in terms of number of years of profitability in range of some specific years and firm
financial position etc. Process that Rosseta stone needs to follow for listing of IPO is give below
1. Creating pitch: In the initial stage of the meeting managers of the firm prepare a detail
plan that they needs to follow in respect to completion of formalities regarding launch of
IPO. In this regard top managers of Board of Directors of the firm will collect
information about the requirements that need to fulfil like submission of financial
statements and other documents to regulatory authority (Judge and et.al., 2015). Board of
Directors will also establish relationship with the underwriters who will make purchase of
firm shares if they will remain unsold in IPO. In respect to this top managers of the
Rosseta stone will evaluate different underwriters and will select best of them.
2. Kick-off meeting: Rosseta stone after making all preliminary preparations will carry out
meeting with its stakeholders like Directors, accountants and investment bank. By
carrying out meeting with all these detail discussion will be carried out about
preparations that needs to be done in further stages. Investment bank will give
recommendation regarding the price at which firm must listed its shares by considering
its forecast earnings and financial position. Investment bank will also frame a prospectus
and present in front of the firm Board of Directors and other stakeholders in the meeting .
In the meeting detail information will be provided about the firm financials and its
business, conditions it currently is facing and strategies that it adopted to cope with
challenges (Pinto and et.al., 2015). Such prospectus will be made available to investors
whether they are retail or institutional investors. On the basis of information provided by
the prospectus investors will be make there investment related decisions.
3. Filling registration statement and due diligence: It is the one of the most important
stage and under this firm needs to file registration statement with SEC of which, Part – I
is preparation of prospectus. Apart from this second part encompass agreements copy that
are signed with underwriter , Rosetta Stone's charter, laws and a specimen of security as
well. Rosseta stone also needs to follow process of due diligence under which will
confirm that it follow all rules and regulations tightly. In this regard all necessary
documents will be made available to the SEC. Apart from this, underwriter of the firm
will form syndicate which will comprise varied investment bankers who will purchase
shares at value less underwriter discount.

4. SEC review: This is another stage and under this SEC will check or review all documents
that are made available by the firm to former entity. As per rules and regulations it
registration statement that is filed by the firm are effective only for 20 days of the filling
date. In any case it is find out that firm make available wrong facts and figures then SEC
will sent letter of comment to the firm and will give twenty days to re-file the registration
statement.
5. Road show: It is a stage in which firm will meet with potential investors that can make
investment in the firm. In respect to this 1-2 week road shows will be done by the
underwriter on behalf of the firm.
6. Pricing meeting: It is a stage in which share price negotiation will be carried out with the
underwriter. Discussion will be carried out on the underwriter discount and amount of
same will be determined on the basis of surrounding condition's and estimation of money
that can be raised from the market.
7. Allocation: In this stage syndicate member will sold there shareholding to those who
wants to make investment under IPO (Laeven, Laeven and Michalopoulos, 2015). Copy
of sales confirmation will be made available to underwriters. In this, underwriter will
cancel the deal if payment is not receive in 5 days after delivering confirmation of sale.
8. Trading: After completion of allocation process trading is commenced on firms shares
and public can buy and sale shares. Offering settlement get completed after 10 days from
commencing date, which is mentioned in the underwriter agreement. Security certificate
is given to the underwriter and updated comfort letter will be delivered to the individual
accountants.
Advantage of IPO
 It helps firm in raising money from the public as debt is commonly available source of
finance but in case of same it is very important to pay interest every year irrespective of
firm profitability. It can be seen that in case of equity it is not necessary to pay dividend.
Hence, it can be said that firm does not have any pressure to pay finance cost.
 By issuing shares in the market firm create its good image and everyone become familiar
with its name (Sikora, Nybakk and Panwar, 2016). It can be said that it become easy for
the firm to create business relationship with other parties.

 By issuing shares capital structure can be balanced by the firm and concentration of debt
can be reduced.
Disadvantage of IPO
 Investors by making investment in the firm reduce powers of the owners of the firm to
make there business decisions. It is major disadvantage of issue of shares.
 Cost of equity is always higher then equity which means that amount of dividend paid by
the firm is always high then interest amount.
3. Market-Multiples approach to identify range of prices for an IPO
Market multiple approach is totally a different method of valuation and under this share
price is valued by using similar type of assets in same price range. Under this approach number
of things are used to value a share like PE ratio, market price and EPS. PE ratio is computed by
dividing share price by the earning per share. On other hand, earning per share is computed
dividing net profit by the shares that are issued by the firm. PE ratio and profit are some of the
specific parameters that can be used to determine share price when IPO is launched by the firm
in the market. PE ratio helps in measuring that share price of the shares price is overvalued or
undervalued in comparison to peer firms or industry (Xavier-Oliveira Laplume and Pathak,
2015). If firm shares PE ratio is below industry PE ratio then it can be said that firm shares are
undervalued and there valuations are appropriate. Contrary to this if it is identified that PE ratio
of the firm is greater then industry then it means that its shares are overvalued and are available
for purchase more then the fair value. In order to compute PE ratio and to check valuation of
Rosetta stone shares some competitor firms are selected like Apollo Group Inc, American Public
Education Inc, Corinthian Education Corp, and Capella Education etc.
Another multiple that is used in this approach are Enterprise value which include total
shares value plus aggregate value of debt. Following formula is used to compute enterprise
value.
Enterprise value (EV) = Market capitalization + Debt fund + Minority interest – Cash and
equivalents – investment
There are other multiples that can be used like EV/EBITDA. In this enterprise value is
divided by the earning before interest and tax. Discounted cash model is another method that is
often used by the research analysts but some of them prefer to use EV/EBITDA method in
comparison to DCF analysis. There are some merits and demerits of these three multiple

approached (Caution, Platt and Platt, 2011). The main merit of these methods is that in these
multiple ratios like PE ratios are used which are computed by using marker facts and figures. to
decide share price. Hence, from market point of view valuation of shares is done in correct way.
Inverse to this, the main weak point of this approach is that it does not consider firm profitability
or its business performance to great extent for valuation like discounted cash flow model.
4. Market-Multiple approach and its use for identifying fair value of shares
Market multiple approach is different method of shares valuation then other methods of
equity valuation. Under this method competitors of the firm are taken in to consideration and
there price earning ratio is computed. By using this method in following way calculations will be
done.
Illustration 1: Average of EV/EBITDA for 2008
Illustration 2: Average of EV/EBITDA for 2009
Illustration 3: PE ratio for 2008

Illustration 4: PE ratio for 2009
It can be seen from the table that 10 peer companies of Rosetta Stone are taken in to account in
the report. The competing companies EV/EBITDA and PE ratio of these firms is also taken in to
consideration. In order to identify whether firm shares are overvalued or undervalued PE ratio of
industry is determined as parameter. After taking PE ratio of all competing firms there average is
computed for FY 2008 and 2009. In case of EV/EBITDA also average is taken for two years
which are FY 2008 and 2009. In order to check valuation of the Rosetta Stone shares EPS is
computed. EPS is calculated by dividing firm total earning by the issues shares. Market price is
taken from websites. Shares market price are divided by the EPS in order to compute PE ratio. It
can be seen from the table that PE ratio of the firm is above industry PE ratio and it can be said
that shares are overvalued. Movements in balance sheet greatly affects the multiples. This is
because in computing same values from mentioned financial statement are taken. Hence, changes
in the balance sheet directly affects the equity valuation that is revealed by the multiples. The
main question that one must ask on the basis of computation of current growth rate is what were
the factors that were responsible for such high growth rate or terminal value? Will these factors
may exist in future with same trend. By obtaining answer of these questions estimation about
likely business growth rate for upcoming years can be made. If assumptions will change then it
will directly put an impact on offer price of shares in IPO. This is because offer price is
determined on the basis of estimation of the firm fundamentals in terms of financial performance
Illustration 5: Valuation of shares

that may be seen in future time period. Hence, if assumptions will change then offer price will
also change. Such a variation may be positive or negative depends on changes that are made in
the assumption. Offer price is computed by using varied methods and each of them revealed the
different share issue price. Decision in respect to price which must be picked must be taken on
the basis of existing economic condition of the nation and investors sentiments regarding making
an investment in the stock market.
5 Reasonable rate of return for Rosetta Stone shares
Required rate of return on Rosetta Stone shares is 2.04% if market gives a return of 5%
and risk free rate of return is 0.3%. Apart from this, if beta value is 0.37 which indicate that there
is less risk on investment that can be made in the Rosetta Stone shares. If one earn less then
2.04% return then it can be said that he does not ger sufficient return on investment that is made
on shares.
6 Cash flow model and explanation on calculations
Illustration 7: CAPM Model
Illustration 6: Required rate of return

Illustration 8: Projected income
Illustration 9: Calculation of enterprise value

It can be seen that first table is of CAPM and it is prepared to measure cost of equity that will be
used to compute weighted average cost of capital. In CAPM model RFR, Market return and beta
value is used to calculate required rate of return. Projections about revenue and expenses are
made and it is expected that on year on year basis income will increase by 35%. Prediction about
expenses are made by taking there percentage of sales for previous years. Same percentage is
used in financial model to make prediction about expenses that supposed to be incurred in the
business. Thereafter, in order to compute weighted average cost of capital enterprise value of the
Illustration 11: Calculation of terminal value
Illustration 10: Calculation of WACC
Illustration 12: Calculation of equity value
Illustration 13: Calculation of intrinsic
value

firm is measured. In this regard market capitalization and long term liability of the firm is taken
in to account. Finally, weight to debt and equity is given in the enterprise value that will be used
to compute WACC. Finally, total equity value of shares is computed and are divided by the
issued shares to compute intrinsic value.
7 Offer price for IPO
Offer price for IPO is taken from the value that is revealed by the discounted cash flow
model. In the report, two methods of stock valuation are used which are market multiple and
DCF model. The intrinsic value shown by DCF model which is 2 is selected as issue price of
shares because this model compute value of shares by using firm past earnings. Thus, it help in
computing fair value of shares. On other hand, there is market multiple method in which PE ratio
is taken in to consideration which is calculated by using shares price. Shares are going to launch
first time in the market and due to this reason PE multiple method can not be used. Hence, offer
price reflected by DCF model is taken in to consideration.

REFERENCES
Books & journals
Boulton, T. J. and Campbell, T. C., 2016. Managerial confidence and initial public offerings.
Journal of Corporate Finance. 37(2). pp.375-392.
Caution, I., Platt, H and Platt, M.2011. Free Cash Flow. SAGE
Judge, W.Q. and et.al., 2015. Corporate governance and IPO underpricing in a cross‐national
sample: A multilevel knowledge‐based view. Strategic Management Journal. 36(8).
pp.1174-1185.
Laeven, L., Levine, R. and Michalopoulos, S., 2015. Financial innovation and endogenous
growth. Journal of Financial Intermediation. 24(1). pp.1-24.
Najmi, M., Sarraf, F. and Darabi, R., 2015. Relationship between Capital Structure, Free Cash
Flow and Performance in Companies Listed on Tehran Stock Exchange. European
Online Journal of Natural and Social Sciences: Proceedings. 4(1). pp.1229-1246.
Pinto, J. E. and et.al., 2015. Chapter 6. Free Cash Flow Valuation. CFA Institute Investment
Books. 2015(4). pp.295-360.
Sikora, A.T., Nybakk, E. and Panwar, R., 2016. The effect of entrepreneurial and learning
orientations on financial performance in a transition economy: evidence from forest
contracting firms in southern Poland. Scandinavian Journal of Forest Research. 31(1).
pp.119-125.
Xavier-Oliveira, E., Laplume, A.O. and Pathak, S., 2015. What motivates entrepreneurial entry
under economic inequality? The role of human and financial capital. Human Relations.
68(7). pp.1183-1207.
Online
Learn a new language now, 2016. [Online]. Available through:< http://www.rosettastone.eu/>.
[Accessed on 30th July 2016].