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Please prepare a write-up detailing the results of your analysis. You do not need to include a separate section detailing the background of the case in the write-up. Instead, focus only on the financial issues and assumptions to make your recommendation. The write-up can be no longer than 3 pages (excluding tables and charts).

Rosetta Stone: Pricing the 2009 IPO:

• - Calculate the WACC, estimate future cash flows, and then use the discounted cash flow method and multiples to price Rosetta Stone?s IPO.
• - What is the appropriate price for the Rosetta Stone IPO? Why?

Instructions for attached material: -Attached is the description of the individual assignment (FIL Individual Assignment) Please read it carefully. Remember this is a financial analysis write up, not just a paper. -TN 46 Rosetta stone (excel) is an excel file that will provide the forecast that we should get using the provided assumptions given in the reading. - Here is a link to a copy of the case reading: http://doc.mbalib.com/view/b36e1f3f24848b78060484e6e9c99528.html The pages for the case start at 677 to 697 out of the 807 (so type this in to get to the location of the case quicker instead of scrolling through the pages). - I also attached the word document that provides teaching notes for better understanding. This spreadsheet supports instructor analysis of the case \"ROSETTA STONE: PRICING THE 2009 IPO\" (Case 46). This spreadsheet was prepared by Associate Professor Michael Schill. Copyright 2010 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. For customer service inquiries, send an e-mail tosales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, posted to the Internet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School Foundation. Rev. Mar. 25, 2011 Exhibit 1 ROSETTA STONE: PRICING THE 2009 IPO Rosetta Stone Income Statement (in thousands of dollars) Revenue Cost of revenue Gross profit Operating expenses: Sales and marketing Research and development Acquired in-process research and development General and administrative Lease abandonment Transaction-related expenses Total operating expenses Income from operations Other income and expense: Interest income Interest expense Other income Interest and other income (expense), net Income before income taxes Income tax expense (benefit) Net income Preferred stock accretion Net income attributable to common stockholders 2004 2005 2006 2007 2008 25,373 3,968 21,405 48,402 8,242 40,160 91,570 12,744 78,826 137,321 20,687 116,634 209,380 28,676 180,704 11,303 1,833 0 6,484 0 0 19,620 1,785 22,432 2,819 0 8,157 0 0 33,408 6,752 46,549 8,158 12,597 16,732 0 10,315 94,351 (15,525) 65,437 12,893 0 29,786 0 0 108,116 8,518 93,384 18,387 0 39,577 1,831 0 153,179 27,525 84 0 120 204 1,989 66 1,923 0 1,923 38 0 134 172 6,924 143 6,781 0 6,781 613 (1,560) 63 (884) (16,409) (1,240) (15,169) (159) (15,328) 673 (1,331) 154 (504) 8,014 5,435 2,579 (80) 2,499 454 (891) 239 (198) 27,327 13,435 13,892 0 13,892 Note: Depreciation and amortization expense was reported as $6.5, $7.8, and $7.1 million, respectively, for 2006, 2007, 2008. Data source: Rosetta Stone preliminary prospectus (Form S-1/A, filed March 17, 2009), U.S. SEC. Exhibit 2 ROSETTA STONE: PRICING THE 2009 IPO Rosetta Stone Balance Sheet (in thousands of dollars) As of December 31 Assets 2007 2008 Cash and cash equivalents 22,084 30,660 Acounts receiviable 11,852 26,497 Inventory, net 3,861 4,912 Prepaid expenses and other current assets 3,872 6,598 Deferred income taxes 848 2,282 Total current assets 42,517 70,949 Property and equipment, net Goodwill Intangible assets, net Deferred income taxes Other assets Total assets Liabilities and stockholders' equity Accounts payable Accrued compensation Other current liabilities Deferred revenue Current maturities of long-term debt Total current liabilities Long-term debt Deferred revenue Other long-term liabilities Total liabilities Commitments and contingencies Common Stock outstanding Additional paid-in capital Accumulated income (loss) Accumulated other comprehensive loss Total stockholders' equity Total liabilities and stockholders' equity Data source: Rosetta Stone prospectus. 13,445 34,199 13,661 6,085 469 110,376 15,727 34,199 10,645 6,828 470 138,818 4,636 4,940 11,421 12,045 3,400 36,442 3,207 8,570 21,353 14,382 4,250 51,762 9,909 894 6 47,251 5,660 1,362 963 59,747 5,000 51,038 8,613 (1,470) (56) 58,125 110,376 0 56,038 10,814 12,422 (203) 79,071 138,818 Exhibit 3 ROSETTA STONE: PRICING THE 2009 IPO Value of $1 invested in January 1998 Exhibit 4 ROSETTA STONE: PRICING THE 2009 IPO U.S. Yield Curve Data Date 1/30/2009 2/27/2009 3/31/2009 4/1/2009 4/2/2009 4/3/2009 4/6/2009 4/7/2009 4/8/2009 4/9/2009 ************* Yields ************** 3 month 1 year 5 year 10 year 30 year 0.24 0.26 0.21 0.22 0.22 0.21 0.20 0.20 0.18 0.18 0.51 0.72 0.57 0.58 0.59 0.60 0.60 0.60 0.59 0.60 1.85 1.99 1.67 1.65 1.74 1.87 1.90 1.87 1.83 1.90 Data source: U.S. Department of the Treasury 2.87 3.02 2.71 2.68 2.77 2.91 2.95 2.93 2.86 2.96 3.58 3.71 3.56 3.51 3.57 3.70 3.73 3.72 3.66 3.76 Exhibit 5 ROSETTA STONE: PRICING THE 2009 IPO Language Coverage of Rosetta Stone Products (2008) Arabic Chinese (Mandarin) Danish Dutch English (U.K.) English (U.S.) Farsi (Persian) French German Greek Hebrew Hindi Indonesian Irish Italian Japanese Korean Latin Pashto Polish Portuguese (Brazil) Russian Spanish (Latin America) Spanish (Spain) Swahili Swedish Tagalog Thai Turkish Vietnamese Welsh Instructional software Level 1 Level 2 Level 3 Data source: Rosetta Stone prospectus. Version 1 Audio companion Version 2 Version 3 Exhibit 6 ROSETTA STONE: PRICING THE 2009 IPO Rosetta Stone Historical Financial Performance (2006 to 2008, in thousands of dollars except percentages) 2006 2007 2008 Revenue Revenue growth 91,570 89% 137,321 50% 209,380 52% EBITDA EBITDA Margin 1,290 1.4% 16,318 11.9% 34,625 16.5% 13,309 58,125 71,434 9,910 79,071 88,981 1.92 11.9% 2.35 30.9% $11.19 $17.49 Total debt Total equity Total capital Capital turnover Return on capital Estimated share value (1) $6.08 (1) Estimated by Rosetta Stone board of directors based on multiple of EBITDA for industry comparables Exhibit 7 ROSETTA STONE: PRICING THE 2009 IPO Financial Forecast for Rosetta Stone (in millions of dollars except percentages) 2008A 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Revenue growth Gross margin SGA exp / Revenue R&D exp / Revenue 52.5% 86.3% 63.5% 8.8% 35.0% 86.0% 63.5% 9.0% 35.0% 86.0% 63.5% 9.0% 30.0% 85.0% 63.0% 8.5% 25.0% 84.0% 63.0% 8.5% 23.0% 83.0% 62.5% 8.5% 21.0% 82.0% 62.5% 8.5% 18.0% 81.0% 62.5% 8.0% 13.0% 80.0% 62.5% 8.0% 10.0% 79.0% 62.5% 8.0% 5.0% 78.0% 62.5% 8.0% Capital expenditures NPPE turnover NWC turnover 7.0 13.5 8.9 5.0 15.0 9.0 8.0 15.2 9.0 9.0 15.4 9.0 9.5 15.6 8.5 10.0 15.8 8.5 11.0 16.0 8.0 11.0 16.2 8.0 9.0 16.4 8.0 8.0 16.8 8.0 5.0 17.3 8.0 209.4 180.7 133.0 18.4 29.4 282.7 243.1 179.5 25.4 38.2 381.6 328.2 242.3 34.3 51.5 496.1 421.7 312.5 42.2 67.0 620.1 520.9 390.7 52.7 77.5 762.7 633.1 476.7 64.8 91.5 922.9 756.8 576.8 78.4 101.5 1,089.0 882.1 680.6 87.1 114.3 1,230.6 984.5 769.1 98.4 116.9 1,353.6 1,069.4 846.0 108.3 115.1 1,421.3 1,108.6 888.3 113.7 106.6 23.4 15.7 31.4 18.8 42.4 25.1 55.1 32.2 73.0 39.7 89.7 48.3 115.4 57.7 136.1 67.2 153.8 75.0 169.2 80.6 177.7 82.2 Revenue Gross profit SGA expense R&D expense EBIT Net working capital Net PPE Source: Case writer analysis. Exhibit 8 ROSETTA STONE: PRICING THE 2009 IPO Principal and Selling Stockholders Name of Beneficial Owner Entities affiliated with ABS Capital Partners Norwest Equity Partners VIII Tom Adams (President, CEO) Eric Eichmann (COO) Brian Helman (CFO) Greogory Long (CPO) Michael Wu (General Counsel) Patrick Gross (Director) John Coleman (Director) Laurence Franklin (Director) Other owners New IPO shares Total shares Data source: Rosetta Stone prospectus. Shares owned prior to offering (000s) 7,556.1 4,940.0 743.7 146.3 91.0 106.2 45.5 20.7 16.2 16.2 3,507.6 (%) 44.0% 28.7% 4.3% 0.9% 0.5% 0.6% 0.3% 0.1% 0.1% 0.1% 20.4% Shares being offered in IPO (000s) 1,889.6 1,235.4 3,125.0 17,189.5 6,250.0 Exhibit 8 ROSETTA STONE: PRICING THE 2009 IPO Principal and Selling Stockholders Recent Number Debt Price s (in millions)in millions) Beta Revenue growth Income growth Price/EPS 2008 2009 EV/EBITDA 2008 2009 63.81 37.56 16.88 21.05 50.34 168.01 42.47 101.6 15.29 14.72 160.15 18.06 86.45 90.09 16.69 13.88 71.64 38.56 28.86 45.47 0.0 0.0 31.9 1.7 0.0 0.0 20.0 150.0 13.7 32.1 0.60 NA 0.75 0.70 0.55 0.55 0.55 0.60 NA NA 15% 55% 16% (2)% 20% 25% 17% 17% 61% 62% 491% 54% 78% 9% 32% 24% 33% 45% 44% 126% 19.2 42.4 28.7 19.5 31.5 33.2 23.2 19.0 18.3 NA 14.5 29.3 18.1 20.0 23.4 25.8 17.5 13.6 35.4 24.3 9.7 20.5 11.6 6.8 13.4 17.8 12.5 10.1 13.4 30.2 7.2 13.8 7.8 6.8 10.3 14.1 9.6 7.4 8.7 11.5 50.33 149.19 0.0 1.20 43% (3)% 32.9 24.5 23.8 17.2 10.03 74.71 3.2 1.3 14.32 379.5 14.93 2.38 25.58 19.16 14.02 1359 429 62.21 97.36 1,287.81 315.25 47.93 41.75 57.58 322 1,393.35 0.0 74.0 60.2 2.1 0.0 0.0 195.9 0.0 0.0 0.0 0.0 NA 1.10 NA 1.65 1.15 0.90 1.15 1.45 0.85 0.90 1.00 124% 29% 9% 8% 11% 31% 29% 20% 15% 15% 3% 340% 24% 2% 63% (22)% 9% (2)% (117)% 114% 55% (78)% 18.5 53.8 12.3 NA 12.8 23.6 NA NA 45.8 NA 32.6 17.2 47.9 25.7 NA 17.1 20.7 NA NA 46.0 24.1 37.3 6.9 27.1 4.5 NA 7.0 13.2 12.2 8.8 18.1 NA 10.2 6.9 23.6 6.9 91.1 8.1 11.3 10.6 11.3 16.4 11.5 10.3 23.64 14.15 25.35 18.83 13.54 37.36 16.47 34.49 29.6 524.27 31.5 320.53 8891 75.05 122.43 819.92 153.72 389.86 350.0 0.0 998.1 0.0 13.2 0.0 1,766.0 0.0 450.0 1.20 NA 0.90 0.80 1.30 1.20 0.90 1.00 NA 13% 34% 15% 18% 107% 44% 5% 22% 42% (41)% 509% 9% (32)% 37% 93% (234)% 77% 62% 14.9 NA 19.5 10.2 NA NA 9.4 26.1 27.1 22.9 52.8 16.2 12.0 NA 57.7 9.5 24.1 33.9 8.6 39.2 9.2 5.9 16.4 35.0 4.7 12.3 21.0 12.6 21.8 7.9 6.8 9.6 20.7 4.9 10.1 23.8 For-Profit Education Apollo Group, Inc. American Public Education Inc. Corinthian Colleges, Inc. Career Education Corporation Capella Education Company Strayer Education, Inc. DeVry, Inc. ITT Educational Services, Inc. K12 Inc. Grand Canyon Education, Inc. New Oriental Education & Technology Group, Inc. Internet Activision Blizzard, Inc. Amazon.com, Inc. Dice Holdings Inc. drugstore.com, Inc. eBay Inc. Google Inc. GSI Commerce, Inc. TechTarget WebMD Health Corp. Electronic Arts Inc. Yahoo! Inc. Software Adobe Systems Incorporated ArcSight, Inc. Intuit Inc. Microsoft Corporation Omniture, Inc. Salesforce.com, Inc. Symantec Corporation McAfee Inc. VMware Inc. Note: The reported multiples are based on 2008 actuals or 2009 expected values, respectively. The numerator is the same for both 2008 and 2009 values. Data source: SEC filings, Value Line Investment Survey, and other analyst reports. Exhibit 9 (continued) ROSETTA STONE: PRICING THE 2009 IPO Financial Data for Industry Comparables For-Profit Education Apollo Group, Inc. Education programs for working adults at the high school, undergraduate, and graduate levels, online and on-campus through subsidiaries. American Public Education Inc. Online postsecondary education degree programs and certificate programs including national security, military studies, intelligence, homeland security, criminal justice, technology, business administration and liberal arts; primarily serves military and public service communities. Corinthian Colleges, Inc. Private, for-profit postsecondary education degree programs in healthcare, electronics, and business. North American private, for-profit postsecondary education in information technologies, visual communication and design technologies, business studies, and culinary arts. Online post-secondary education services company; doctoral, master's and bachelor's programs through their subsidiary. Holding company of Strayer University, which offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration to working adults. North American higher education programs, offering associate, bachelor's and master's degree programs in technology; healthcare technology; business, and management; also offers online secondary education to school districts and medical education. Technology-based postsecondary degree programs in the United States. Technology-based education company; proprietary curriculum, software and educational services created for online delivery to students in kindergarten through 12th grade. Online undergraduate and graduate degree programs in education, business, and healthcare. Foreign language training and test preparation courses in the United States and the People's Republic of China; development and distribution of primary and secondary educational content and technology. Career Education Corporation Capella Education Company Strayer Education, Inc. DeVry, Inc. ITT Educational Services, Inc. K12 Inc. Grand Canyon Education, Inc. New Oriental Education & Technology Group, Inc. Internet Activision Blizzard, Inc. Amazon.com, Inc. Dice Holdings Inc. drugstore.com, Inc. eBay Inc. Google Inc. GSI Commerce, Inc. TechTarget WebMD Health Corp. Electronic Arts Inc. Yahoo! Inc. Software Adobe Systems Incorporated ArcSight, Inc. Intuit Inc. Microsoft Corporation Interactive entertainment software and peripheral products. Diversified online retailer with emphasis on books. Career services and recruiting. Online drugstore. Online trading community. Web-based search engine and global technology company. E-commerce business developer/operator. Industry-specific portal operator. Health information services for consumers, physicians, healthcare professionals, employers, and health plans. Interactive entertainment software and peripheral products. Internet media company providing Web navigation, aggregated information content, communication services, and commerce. Computer software products and technologies. Security and compliance management solutions. Business and financial management software solutions. Operating system software, server application software, business and consumer applications software, software development tools, and Internet/intranet software; also video game consoles and digital music entertainment devices. Omniture, Inc. Salesforce.com, Inc. Online business optimization software. Application services that permit sharing of on-demand customer information. Symantec Corporation McAfee Inc. VMware Inc. Security, storage, and systems management solutions. Computer security solutions. Virtual infrastructure solutions. Data source: Adapted from company sources. Exhibit TN1 ROSETTA STONE: PRICING THE 2009 IPO Financial Valutaion for Rosetta Stone (in millions of dollars except percent) 2008A 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Revenue growth Gross margin SGA exp / Revenue R&D exp / Revenue 52.5% 86.3% 63.5% 8.8% 35.0% 86.0% 63.5% 9.0% 35.0% 86.0% 63.5% 9.0% 30.0% 85.0% 63.0% 8.5% 25.0% 84.0% 63.0% 8.5% 23.0% 83.0% 62.5% 8.5% 21.0% 82.0% 62.5% 8.5% 18.0% 81.0% 62.5% 8.0% 13.0% 80.0% 62.5% 8.0% 10.0% 79.0% 62.5% 8.0% 5.0% 78.0% 62.5% 8.0% Capital expenditures NPPE turnover NWC turnover 7.0 13.5 8.9 5.0 15.0 9.0 8.0 15.2 9.0 9.0 15.4 9.0 9.5 15.6 8.5 10.0 15.8 8.5 11.0 16.0 8.0 11.0 16.2 8.0 9.0 16.4 8.0 8.0 16.8 8.0 5.0 17.3 8.0 209.4 180.7 133.0 18.4 29.4 282.7 243.1 179.5 25.4 38.2 381.6 328.2 242.3 34.3 51.5 496.1 421.7 312.5 42.2 67.0 620.1 520.9 390.7 52.7 77.5 762.7 633.1 476.7 64.8 91.5 922.9 756.8 576.8 78.4 101.5 1,089.0 882.1 680.6 87.1 114.3 1,230.6 984.5 769.1 98.4 116.9 1,353.6 1,069.4 846.0 108.3 115.1 1,421.3 1,108.6 888.3 113.7 106.6 23.4 15.7 31.4 18.8 42.4 25.1 55.1 32.2 73.0 39.7 89.7 48.3 115.4 57.7 136.1 67.2 153.8 75.0 169.2 80.6 177.7 82.2 1 23.7 1.9 5.0 8.0 12.6 2 31.9 1.7 8.0 11.0 14.7 3 41.5 1.9 9.0 12.7 21.7 4 48.1 2.0 9.5 17.8 22.7 5 56.7 1.5 10.0 16.8 31.4 6 62.9 1.6 11.0 25.6 27.9 7 70.9 1.5 11.0 20.8 40.6 8 72.5 1.2 9.0 17.7 47.0 9 71.3 2.5 8.0 15.4 50.4 10 66.1 3.4 5.0 8.5 56.0 972.4 8.8 Revenue Gross profit SGA expense R&D expense EBIT Net working capital Net PPE Valuation Terminal growth rate Discount rate Shares outstanding (000s) Debt value 4.0% 10.0% 17.2 9.9 0 NOPAT + Depreciation - Capex - Change in NWC Free cash flow Terminal value Implied EV/EBITDA multiple Discounted value Total value Equity value Share price 11.4 12.1 16.3 15.5 551.2 541.3 $31.49 Trailing EBITDA Multiple Average Median K12, Inc Proposed Multiple EBITDA Ent Value Eq Value Share price 14.8 34.6 513.5 503.6 29.30 12.3 34.6 425.9 416.0 24.20 13.4 34.6 464.0 454.1 26.41 8.0 34.6 277.0 267.1 15.54 Forward EBITDA Multiple Average Median K12, Inc Proposed Multiple EBITDA Ent Value Eq Value Share price 14.2 40.0 569.0 559.1 32.53 10.3 40.0 412.4 402.5 23.41 8.7 40.0 348.3 338.4 19.69 8.0 40.0 320.3 310.4 18.06 19.5 15.8 20.8 21.9 21.4 396.5 11 68.7 3.3 7.1 58.3