Strategic Capital Management

Strategic Capital Management

1. The market capitalization for Creative computers on December 9th 1998 is $232,930,493.30 and $326,429,387.10 for Ubid. I got these numbers by multiplying shares outstanding by stock price. To be quite honest these valuations seem excessively inflated for both of these companies. I understand the rapid growth both saw in that last quarter 1998 but that rapid growth can also be a red flag for investors. Ubid closed on its IPO at a market valuation of $439 million and for a company that is selling computer parts over the internet that is an alarming value especially since its only day one. In addition, since Ubid is trading at a $12 premium to its parent company, which holds 80% of its equity, this is a clear violation of the efficient market hypothesis and raises some questions.

2. Since the parent company Creative Computers is underpriced relative to its subsidiary I would invest in both. There are a couple strategies one could look into depending on how risky you would like to be. You could simply short Ubid since we figure it is overpriced, the negative of this is that if the price goes up you will lose a lot of money. You could buy both and make money if each rises, or when Ubid falls you can protect your downside by having invested in Creative Computers. I would advice Elena to short Ubid and Buy Creative Computer stock. Now the back end could get ugly if Ubid stock does rise but we have already determined that it is overpriced so why not take advantage of that.

3. A few examples of mispricing during the internet bubble would be Yahoo and Pets.com. Now Yahoo is still alive today obviously but this was grossly mispriced during the bubble. Pets.com failed because its business was unsustainable but one could have taken advantage of either of these mispricings in this time. If you know, or rather have a strong information that leads you to believe a stock is mispriced than take action based on what you think that stock will...