: Pricing the 2009 IPO
Please address the following questions in your writeup.
1. What are the advantages and disadvantages of Rosetta Stone going public?
2. What do you think the current market price is for Rosetta Stone shares? Justify your valuation using both discountedcashflow and comparables...
each
investment rule: Does it use cashflows or accounting earnings? Does it consider all cashflows
or not? Does it apply a proper discount rate? WPlease compare the advantages and disadvantages of the following investment rules: Net
Present Value (NPV), Payback Period, Discounted Payback...
sufficient to recover its initial cost.
Ex: Initial investment = $500
Year
CashFlow
1
$100
2
$200
3
$500
2. Analyze rule:
Advantages:
Easy to understand
Adjusts for uncertainty of later cashflow
Biased toward liquidity
Disadvantages:
Ignoring time value decide to take...
correct the disadvantage of the payback period by accounting for the time value of money. To calculate the discounted payback period, a discountedcashflow is used in the calculation. The discountedcash inflow is calculated by dividing actual cash inflow by the present value of each cash inflow. To...
many managers use a modified version called the discounted payback period. The calculation is similar to that of the original payback period except that the future cashflows are discounted by the cost of capital. (Kidwell & Parrino, 2009) Also, unlike the original payback period, the...
, easy to understand
Ignores time value of money
Rough screening
Ignores cashflow after post payback period
Focuses on speedy returns

Advantages further explained:
 The better investment is the one with the shorter payback period
Disadvantages further explained:
 Payback period ignores...
 directors performance is judged by shareholders “return on investment”
 takes account of the life of the project.
Disadvantages;
 a percentage return does not take into account the actual cashflow benefits to a company’s liquidity.
 Doesn’t take into account the time value of money...
take into account the time value of money which is a serious drawback since it can lead to wrong decisions. A variation of payback method that attempts to remove this drawback is called discounted payback period method. One other disadvantage would be the cashflows that occur after the payback...
traded companies
Using information from the case we perceived the IPO pricing of $2426 was determined by using the comparable multiples approach. Therefore, we will use the discountedcashflows method to determine an introductory price and evaluate whether it is inline with the current proposed...
.
Advantages
1. DCF is theoretically strong method.
2. DCF considers different factors into calculation.
3. DCF is less biased to accounting errors and manipulations
4. DCF is based on future cashflows rather than past results.
Disadvantages
1. Terminal value of the...
an investment increases the firm's value
Ignores cashflows beyond the payback period
Ignores the time value of money
Ignores the risk of future cashflowsDiscounted Payback Period
Advantages
Considers the time value of money
Considers the riskiness of the project's cashflows (through the...
examples of Relevant Cashflows
5) Why Time Value of Money is Key Concept in investment Appraisal?
6) Assumptions of discountedcashflows
7) How inflation may complicate analysis of Decisions Difference between Specific inflation rate and General inflation rate
9) Advantages and disadvantages of...
total return under project Q is $85,000.
Conclusion: PBP on its own is not an adequate investment appraisal technique.
Advantages:
* simple and easy to calculate and understand
* Uses cashflows rather than accounting profits
* It can be used as screening device as a first stage in...
.
Discounted Payback Period will convert the cashflow as the present value and compare the discounted breakeven point that the project can discountedcashflows payback within a predetermined cutoff. Since the calculating is similar with Payback so they share their advantage and disadvantage...
zero. It helps to measure efficiency of the capital investment. The advantages of it are: liquidity is one of the main emphasis as well as the timing of net cashflows, and also this technique gives an accurate percentage return on an investment (Dyson 2010, p.432). The disadvantages are: the rate of...
. Several evaluation techniques had been developed or assessing economic worth of projects. These techniques can be classified into two categories as follows:
1. Traditional Techniques or Nondiscountedcashflow criteria, under which we have two methods:
(i) Pay Back Period (PBP), and...
Capital Budgeting
Part I
PV= FV / (1+i)^y PV= present value, FV= future value, i= discount rate, and y= time.
1a) If the discount rate is 0%, what is the projects net present value?
Year CashFlow Discount Rate DiscountedCashFlow
0 $400,000 0...
flow after that period will be totally ignored. Therefore, it would be a disadvantage for Payback period and Discounted Payback Period because the amounts after payback period do matter in some aspects.
Only Internal Rate of Return (IRR), Profitability Index (PI) and Net Present Value (NPV) use all cashflow and discount value....
, 2008). Another disadvantage is that this method ignores the timing of the returns; and gives equal weight to all cashflows before the cutoff; this will be addressed when discussing the Discounted Payback method (Lefley, 1996).
There has been a significant amount of research done about the use of...
methods are formally referred to as the Discounted Future Economic Income methods.
* EquityApproach
* Flows to equity approach (FTE)
Discount the cashflows available to the holders of equity capital, after allowing for cost of servicing debt capital
Advantages: Makes explicit allowance...