Strategic Capital Management LLC A Case Solution

2. Evaluate these valuations with respect to the assets associated with these firms. Do the valuations of each seem reasonable? Explain your answer. If necessary, also explain quantitatively.

A comparison of the market capitalization values of Creative computers and Ubid shows that the market value of equity for these companies is much greater than asset values for these companies. Balance sheet data for these companies shows that the value of the assets as of December 1998 is $142,831,000 and $6,048,000 for Creative computers and Ubid respectively; whereas, the market capitalizations for these companies are $323,930,493 and $326,429,387 respectively. In comparison to the asset base, the market value of Creative computers is 1.63 times whereas the market value of equity for Ubid is approximately 53.97 times. The values of the market capitalizations for these companies are very high because of the expectations of investors regarding the future growth of the earnings of the company. Based on the sales growth rate of Ubid, these high values are justified to some extent. The growth rate of sales of Ubid for the first and second quarters remained 637% and 127% respectively, whereas the growth rate of sales for creative computers was approximately 51% over the last year. These high growth rates were the reason why the stock prices of these companies were increasing tremendously in the stock market. The perceptions of holders of the stocks in the market were very positive regarding the future growth of earnings, and hence, the market value of equity was much higher than that of the asset base.