UV3930
Rev. Mar. 25, 2011
ROSETTA STONE: PRICING THE 2009 IPO
We are changing the way the world learns languages.
—Tom Adams
It was mid-April 2009. Tom Adams, president and CEO of Rosetta Stone, Inc. (Rosetta
Stone), the language learning software company, reached for his iPhone to contact Phil Clough of private equity fund ABS Capital. Adams and Clough had been discussing plans to take
Rosetta Stone public for some time. The wait was finally over.
In the wake of the 2008 financial crisis, the market for initial public offerings (IPOs) evaporated. By early spring the market was showing its first encouraging signs. Just a week prior, Chinese online videogame developer Changyou.com had listed on the NASDAQ at a price
to
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With the crisis in full swing, investors had flocked to U.S. Treasuries for security, pushing down yields on these instruments to historic lows (see Exhibit 4). Heightened investor risk aversion had expanded the risk premium for all securities. The general market risk premium was currently estimated at 6.5% or 8.5%, respectively, depending on whether long-term or short-term government yields were used in estimating the risk-free rate.
In February and March of 2009, there had been some evidence of improvement in financial and economic conditions. Wholesale inventories were in decline. New-home sales were beginning to rise. The equity market had experienced a rally of over 20% in recent weeks. Yet many money managers and analysts worried that such economic green shoots were only a temporary rally in a longer-running bear market. There was strong concern that the magnitude of government spending would spur inflation in the U.S. dollar. GDP growth was still negative, corporate bankruptcy rates and unemployment were at historic highs, and many believed the economic void was just too big for a quick recovery to be feasible. A Wall Street Journal survey of U.S. economists suggested that the economy was expected to generate positive growth in the last half of 2009.1 In contrast, a survey of U.S. corporate executives stated that less than a third of respondents expected to see an economic upturn in 2009.2 The
Risk free rate is taken to be 4.69% while the market risk premium is 5.01%.
Midland’s choice of market risk premium of 5% does appear to be an appropriate selection in this instance. From exhibit 6, we found that this EMRP is lower than the historical data of U.S. stock returns minus Treasury bond yields and is higher than the market risk premium from the survey results. So we recommend that the risk premium rate can be narrowed between 4.8% to 5.6%. 4.8% is the lowest of higher EMRP while 5.6% is the highest of the lower EMRP. In a word, our team think that 5% is a reasonable market risk premium.
Looking back over the past ten years and most especially the past three years for investment returns and economic possibilities, there seems to be more growth in the past 24 months than what we have seen in over a decade. The rapidly changing international economic climate and the current government struggles with tax based polices and the continued climbing US
According to Aswath Damodaran equity risk premium in the US in 1979 was 6.45%, thus
up again. Even the farm market saw a turn around. The gold supply grew. Treasury
have gone up 4.2% over the past year and it is predicted they will rise
strong gains for the next two years. This kind of curve is most closely associated with the middle, salad days of an
“Statistics, however, can only partially give an account of the extraordinary hardships that millions of United States citizens endured” (Hardman). It was not uncommon to see once wealthy individuals trying to sell common goods on the sides of the street in order to keep some semblance of their previous lifestyle. And those less fortunate than the so-called wealthy had to suffer through a wave of hunger and poverty like none other before it. Having society dropped to its knees, the aftermath of the stock market crash brought upon massive amounts of unemployed citizens due to people’s inability to sustain their businesses financially. This sudden growth in population of unemployed people led to industrial processes dissolving in
They also used monetary policy to support President Ford’s stimulus package strategy, efforts to stimulate the economy. Nominal interest rates fell at a good rate in 1974, causing the recovery to be well under way by when it began to rise again in
Writing was very important to the Ancient Egyptians. It was their way of keeping track of history. For example, they wrote down important documents that they may use later in their life. They wrote down ideas that they later passed on to the next generation. But, they did not use the American alphabet. They used a system containing pictures that made various sounds. But how did scientist understand this language? It was all because of the discovery of the Rosetta Stone.
The Rosetta stone was the key to the decipherment of the Egyptian hieroglyphs. The Rosetta stone was used to understand Egyptian hieroglyphics, and is what has allowed us to learn and discover more about Egyptian history. The historic discovery of the Rosetta stone is a bounteous history. Its history is fill with French and British rivalries, historical events, a decree to the ruler at the time, information on what languages were used, and discovery of ancient Egyptian. Without the Rosetta stone we would know nothing of the ancient Egyptians today (Mystery of the Rosetta stone).
The risk premium is equal to the difference between the risk-free rate and the expected market return. The case study provides two historical equity risk premiums; the geometric and arithmetic mean. The conventional wisdom is that the geometric mean is considered a better estimate for valuation over long periods, while the arithmetic mean a better estimate for valuation over shorter periods. To coincide with the choice of the 20yr yield on U.S. Treasuries, the geometric mean was therefore chosen for this analysis i.e. (Rm-Rf) = 5.9%
(1) According to the case, global IPO activity during the first quarter of 2012 fell to $14.3 billion, which was dramatically down from $46.6 billion during the first quarter of 2011. In addition, we can see in Exhibit 5 that IPO activity in US have dropped sharply since the second quarter of 2011. Number of deals dropped from 383 in the second quarter of 2011 to 157 in the first quarter of 2012.
per our assumptions, our equity risk premium4 is 6.5%. Our Risk Free rate (Rf) is