Scm: a Survey

In: Business and Management

Submitted By Leecj123
Words 654
Pages 3
Strategic Capital
Management
Q2 & 3

What is the current stock market valuation of Creative Computers and of Ubid based on the stock prices as of December 9? Evaluate these valuations with respect to the assets associated with these firms.
09-Dec-1998

Creative Computers

Ubid

22.75

35.6875

10,238,703

9,146,883

Market Value ($)

232m

326.4m

Book Value

142m

6m

1.63

53.97

Stock price ($)

Shares
Outstanding

Book to Market ratio Creative computer
• Due to obtain 80% of Ubid shares six months after its IPO (3-Dec).
• 80% x $326.4m = $261m (which is less than the market value of the Creative
Computers)

Ubid
• 1.1m pre tax loss in Q3 1998

Cont…
Shows mispricing in the market.
Based on how the market prices Ubid, we can see that Creative Computers is mispriced and should go up in price.
Or the market is behaving irrationally, and Ubid is overpriced.

Which investment strategy involving Creative Computers and Ubid do these valuations suggest?
We think Elena should not purchase Ubid or Creative Computers. Due to the fundamental risk of arbitrage, we think that we should stay away from purchasing
Creative Computers and shorting Ubid, as the mispricing may exist or worsen longer than the hedge fund can remain solvent. We also wouldn’t want to purchase either stock, as Ubid’s stock is likely to crash when the mispricing corrects itself. In addition,
Ubid has still not proven positive earnings and could eventually default on their loans.
The fact that it “book-value-wise” has a negative stockholder’s equity value means that if Ubid does default, their equity holders would receive no compensation.
Creative Computers owns a significant portion of Ubid’s equity and holds a market capitalization that is actually lower than its market value investment in Ubid. This could cause solvency problems…...

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