Case 46 of the textbook addresses what the initial public offering of Rosetta Stone in early 2009.

You are going to determine whether management is reasonable in its assumption that the IPO price per share should be in the $15-$17 per share range.

To determine reasonableness, you will need to do your own estimates of the IPO price using market multiples and discounted cash flow analysis.

Note that in the final exam folder in Blackboard, there is a spreadsheet template file for this case that you may use.

1. The case write-up suggests using K12 as a comparable company. Based separately on K12's price/EPS ratio and Enterprise Value/EBITDA ratio applied to Rosetta Stone's financials, determine range of price per share.

Note that when you derive enterprise value for Rosetta, you will need to subtract Rosetta Stone's debt to determine the market value of equity before deriving price per share.

2. Prepare a discounted cash flow analysis using the Exhibit 7 assumption financial assumptions. You will need to do year-by-year projections of free cash flow through 2018 and prepare a terminal value estimate free cash flow for 2018 based on a reasonable constant growth rate for future.

Note that the case gives you tax rate information. You may use 10% as your WACC estimate.

Note that the present value of free cash flows will provide you enterprise value and that you will need to deduct Rosetta Stone's debt (provided in the case).

It is important to note that Free Cash flow is equal to: net operating profits after tax + depreciation - capital expenditures - annual change in net working capital.

3. Discuss weaknesses that may appear in your analysis.