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Ubid, an Internet auction firm and subsidiary of Creative Computers, a catalog distributor of computer and computer peripherals released its IPO recently. Creative Computers plans to expand its distribution network by opening retail outlets. However, the direct pressure on profits margins in the computer business forces the firm to sell Ubid. SCM, a hedge fund which looking forward to putting the fund and to get positive return, closely monitors and researches the IPO price of Ubid.
On December 9, 1998, Creative Computers was trading at $22.75 and Ubid was trading at $35.6875. At that time, Creative Computers had 10,238,703 shares outstanding and Ubid had 9,146,883 shares outstanding. Since stock Valuation equals to stock price times outstanding shares, the stock valuation of Creative Computer equals to 22.75*10,238,703=232,930,493.3 and Stock Valuation of Ubid is 35.6875*9,146,833= 326,429,387.1.
After the IPO of Ubid, Creative Computer holds approximately 80% of Ubid’s security. Add an account “Security” in the left side of the balance sheet to reflect the market value of Creative Computer’s stake in Ubid. ((9146883-1817000)*35.6875=261,585 thousands of dollars).
On the right side, calculate the market value of Creative Computer’s stock by timing $22.75 with 10,238,703 shares to get 232,930 thousands of dollars. | Consolidated Balance Sheet of Creative Computer | Assets | (thousands of dollars) | Liability & Equity | | Cash and Equilvalent | 15,528 | Accounts Payable | 75,877 | Accounts Receivable | 40,564 | Short-term Debt | 2,969 | Inventory | 44,958 | Other Current Liabilities | 15,336 | Other Current Assets | 12,428 | Capital leases | 29 | PPE | 15,040 | Notes Payable | 154 | Securities (Ubid) | 261585 | | | Other Long-term Assets | 14,313 | Stock holder’s equity | 232,930 | Total Asset | 404,416 | Total