Rosetta Stone, Inc.: Pricing the 2009 IPO

Abstract:     
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: 1. Review the institutional aspects of the equity issuance transaction. 2. Explore the costs and benefits associated with public share offerings. 3. Develop an appreciation for the challenges of valuing unseasoned firms. 4. Hone corporate valuation skills, particularly using market multiples. 5. Evaluate the received explanations of various finance anomalies, such as the IPO underpricing phenomenon.

Number of Pages in PDF File: 23

Keywords: IPO Valuation Case

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