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Strategic Capital Management LLC A Case Solution

Solution Id Length Case Author Case Publisher
1112 561 Words (2 Pages) Erik Stafford, Mark Mitchell, Todd Pulvino Harvard Business School : 202024
This solution includes: A Word File A Word File and An Excel File An Excel File

Stock market valuation or the market capitalization of the company is dependent on the product of the share price and the number of shares outstanding. On December 9, 1998, the number of shares outstanding for creative computers is 10,238,703 whereas the number of shares outstanding for Ubid on the same day is 9,146,883. The closing prices of trading of the shares on that day were $22.75 and $35.6875 per share for creative computers and Ubid respectively. Thus, using this information, the market value of equity for both of the firms can be calculated using the following formula:

Market Capitalization = Share price per share * number of shares outstanding

Thus, market capitalization for these companies comes out to be $323,930,493 and $326,429,387 for creative computers and Ubid as of December 9, 1998.

Following questions are answered in this case study solution

  1. What is the current stock market valuation (i.e., market capitalization) of Creative Computers and of Ubid based on the stock prices as of December 9, 1998?

  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.

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Case Analysis for Strategic Capital Management LLC A

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.

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