1. What is going on at Rosetta Stone?

2. Tell me about the economics of the Rosetta Stone business. Is this a business that you expect will generate interest among investors?

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

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

5. Let’s look at a discounted cash flow-model approach to valuing Rosetta Stone. Is everyone comfortable with the financial forecast in case Exhibit 7? What are the key assumptions? Is the length of the forecast period reasonable?

6. What discount rate is appropriate for the cash-flow forecast?

7. What was your approach for terminal value? How do your terminal value assumptions affect the estimated value of Rosetta Stone shares?

8. What is an IPO and why is it such a big deal? Is this a good idea for Rosetta Stone?

9. What offer price would you set for the Rosetta Stone IPO?

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 backdrop, students are exposed to a well-known finance anomaly—the IPO underpricing phenomenon—and are invited to critically discuss various proposed explanations.

The case provides opportunities for the instructor to develop any of the following teaching objectives:

• Review the institutional aspects of the equity issuance transaction.
• Explore the costs and benefits associated with public share offerings.
• Develop an appreciation for the challenges of valuing unseasoned firms.
• Hone corporate valuation skills, particularly using market multiples.
• Evaluate the received explanations of various finance anomalies, such as the IPO underpricing phenomenon.