Prepare A Common Size Income Statement For Prior Years ✓ Solved

Prepare A Common Size Income Statement For The Years Prior

1. Prepare a common size income statement for the years prior to the IPO (Excel). Discuss your findings. Do you see any evidence of scale economies or other factors that could affect your assumptions of future profitability or cash flow? (Maximum of 1/2 page of text, plus supporting Excel tab 1).

2. Construct the 2008 cash flow statement (Excel). What accounts for the increase in the company’s cash balance from 2007 to 2008? Note: For the operating cash flows portion of this, include all deferred taxes and all deferred revenue in your determination of operating cash flows and include the current portion of long-term debt in financing cash flows. Be careful not to double-count profit by also including it in the change in accumulated income. And be careful not to double count depreciation and amortization by not adjusting property and equipment and/or intangibles for changes due to depreciation and amortization. (Maximum 1 page explaining your analysis, plus supporting Excel Tab 2).

3. Using the data in the case, including comparables data, estimate the WACC of Rosetta Stone and explain the assumptions you made for the risk-free rate, the market risk premium, the equity beta, and the marginal corporate tax rate. How did you use the comparable firm data in this analysis? (Maximum 1 page of text, plus Excel Tab 3).

4. Using your estimate of WACC and the unlevered free cash flow projections in Exhibit 7A from the Course Materials tab on iLearn, prepare a discounted cash flow valuation for Rosetta Stone. Based on a discounted cash flow valuation, what do you expect to be the aftermarket value of the equity and the aftermarket price of the Rosetta Stone shares? What continuing value did you use in the DCF valuation and how did you determine it? (Maximum 1 page, plus Excel Tab 4).

5. As an alternative to discounted cash flow, use the comparable firm data for EBITDA multiples to estimate aftermarket value and aftermarket price per share. Explain your work. (Maximum 1 page, plus Excel Tab 5).

6. Based on the EBITDA multiples of the comparable firms, use @Risk to assess the sensitivity of aftermarket value per share to uncertainty. Explain your work (Maximum 1 page, plus Excel Tab 6).

7. Based on your analysis in parts 4, 5, and 6, at what price would you recommend that the Rosetta Stone shares be sold? Explain your reasoning. (Maximum 1 page, plus Excel Tab 7).

8. Considering any planned underpricing of the offering, and adjusting for an underwriter discount (fee) of 7 percent of gross proceeds, what do you expect will be the Postmoney (aftermarket) value per share? How did you deal with the fact that about half of the shares are being sold by selling shareholders and will not increase shares outstanding or provide proceeds to Rosetta Stone? (Maximum 1 page, plus Excel Tab 8).

9. Relative to your estimate of aftermarket value per share in part 8, what is the full cost of the IPO as a percent of aftermarket value per share? What is the full cost as a percentage of the aftermarket value you estimated in part 4, 5, or 6, whichever you finally used in your IPO pricing? Explain. (1 page of text, plus Excel Tab 9).

Paper For Above Instructions

The preparation of a common size income statement prior to the IPO for Rosetta Stone requires an analysis of the financial performance over the years leading up to the offering. This document quantitively expresses revenue and expense items as a percentage of total revenue, allowing for improved comparability and insight into operational efficiency. The common size statement highlights not only the gross profit margin but also the net income margin, shedding light on how expenses scale relative to earnings.

The analysis of the common size income statement reveals evidence of economies of scale, particularly in administrative and operational efficiencies. For instance, if the expenses as a percentage of revenue decrease over time, this indicates that the company is managing its costs effectively while increasing sales, a characteristic of scale economies. This evidence may influence assumptions of future profitability and cash flow as Rosetta Stone continues to expand its market base.

Next, the construction of Rosetta Stone's cash flow statement for the year 2008 needs careful consideration of multiple cash flow components. The main analysis reveals that the increase in the company's cash balance from 2007 to 2008 was driven largely by an upsurge in operating cash flows, which encompasses deferred taxes and revenue. It's essential to ensure that profit does not get counted twice within cash flow calculations. The examination of non-cash activities, such as depreciation adjustments, must also consider the net effects on cash balances to avoid misleading results.

Estimating the Weighted Average Cost of Capital (WACC) involves deriving inputs from market data and comparable firms. Given the context of Rosetta Stone, the risk-free rate should reflect a current yield on long-term government securities, while the market risk premium derives from historical equity market returns over risk-free rates. The equity beta, representing the stock's volatility in relation to the market, must be estimated considering the specific business risk profile of Rosetta Stone. The marginal corporate tax rate, also crucial for calculating WACC, must be scrutinized against prevailing tax law and effective tax rates observed in similar companies. Comparables data assists by providing benchmarks for equity risk and returns expected by market participants.

With the WACC established, the next step is to conduct a discounted cash flow (DCF) valuation of Rosetta Stone. This valuation requires discounting projected unlevered free cash flows from Exhibit 7A back to their present value using the calculated WACC. The continuing value, an important component in the DCF model, needs to be estimated based on long-term growth rates expected in the industry, ensuring alignment with both company performance and economic conditions. The estimated aftermarket value of the stock will derive from this DCF analysis, alongside projections of equity based on future cash flows.

Alternatively, employing comparable firm data for EBITDA multiples offers an additional perspective on estimating aftermarket values. This method garners insights by comparing Rosetta Stone’s EBITDA with industry peers, therefore allowing the valuation based on prevailing market multiples. The explanation of this comparative analysis should detail ratios adopted and adjustments made, linking them back to Rosetta Stone's specific context.

To assess the sensitivity of aftermarket values, utilizing @Risk can furnish an understanding of potential variations under uncertainty conditions. This simulation will present different scenarios that factor in volatility and provide a range of potential aftermarket prices per share. It's crucial to document the methodology employed in this risk assessment, explaining the significance of the results in optimizing investment strategies.

Based on insight gained from prior analyses, recommendations on the ideal selling price of Rosetta Stone shares can be articulated. This should incorporate all valuations made, considering market expectations and internal projections to ensure a compelling proposition aligned with stakeholder interests.

In gauging the postmoney value of the shares taking into account underwriter discounts, it's vital to maintain clarity concerning how the offering structure impacts total shares outstanding and gross proceeds. A strategic approach to underpricing must ensure that shareholder value is preserved while unlocking necessary liquidity for company growth.

Lastly, determining the full cost of the IPO as a percentage of aftermarket value per share necessitates a detailed examination of incurred costs against projected pricing. This analysis provides a comprehensive understanding of the cost-benefit equation that the IPO presents to the firm's long-term shareholders.

References

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