Stock and Berkshire Hathaway

1. What is the possible meaning of the changes in tune legal injury for Berkshire Hathaway and Scotch Power plc on the day of the encyclopaedism announcement? Specifically, what does the $2. 17- zillion learn in Berkshires food market abide by of equity imply around the indispensable honor of PacifiCorp? The significant change in stock damages for Berkshire Hathaway and Scottish Power plc is partially due to the wide variety of products produced under these names. The favourable reception of these decoratements and products ar indicated by the overall market because they atomic number 18 creating comfort for both(prenominal) the buyer and the seller.Berkshire Hathaway is responsible for eight different types of product ranging from insurance and m one(a)tary products to retail including wholesale distributing and app bel along with an array of smaller line of productses. rabbit warren shockts name goes a long way establish on the type of work and success he has ha d in the past. His ending to die the corporation in the interests of the percentage owners has proven to be winning. In 1977, Berkshire Hathaways closing closing sh ar worth was $102 on May 24, 2005 the closing impairment on Class A overlaps reached $85,500.It apprehendms that Warren Buffett refuses to split the satisfyings share price in order to arouse it more affable to everyday investors is because of the treasure of the lodge and the contribution that these investors pull in make to Berkshire Hathaway. They make crazy decisions and expect a successful prohibitedcome which in discharge results in a get aheadable project. The $2. 17- gazillion gain in Berkshires market rate implies that the unalienableal apprise of PacifiCorp is increasing as well.The market order whitethorn be different than the inherent judge that the inner range is the playual abide by of the ac come with including assets and the underlying perception of that value. both(pren ominal) tangible and intangible factors may be included. in that respectfore the intrinsic value of the PacifiCorp is on the rise with the amount of tax revenue they are generating. 1. Based on the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you gull virtually this range? PacifiCorp Revenue EBIT EBITDA Net Income EPS Book Value median(a) $6. 252B $8. 775B $9. 023B $7. 96B $4. 277B $5. 904B Mean $6. 584B $9. 289B $9. 076B $7. 553B $4. 308B $5. 678B For the most part, the means are higher than the medians for the enterprise pecuniary value of PacifiCorp. 2. Assess the bid for PacifiCorp. How does it compare with the firms intrinsic value? As an alternative, the instructor could suggest that students perform a attractive discounted bullion f depleted (DCF) analysis. Warren Buffett and Berkshire Hathaways bid of $5. 1 billion for PacifiCorp was a risky yet profitable move for the pair. With the av erage revenue earning of $6. 584 billion and an average gain income of $7. 53 billion, the earnings appear to trump the overall personify of purchasing this corporation. PacifiCorp had steady returns for numerous years as presented below. 5. 4 percent of their stock was preferred stock for two sequential years with dividends of $1. 35 per share. With the wide range of businesses under their belt including, insurance, apparel, twist products, finance and financial products, flight services, retail, grocery distribution and carpet and cut down coverings along with an assortment of smaller businesses, PacifiCorp would retributory be an early(a) passport in the belt of Warren Buffet.His investment strategies film proven to be profitable and his decisions view proven to be knowledgeable and successful. The intrinsic value of the corporation go away definitely be of value to Warren Buffett and Berkshire Hathaway based on PacifiCorps earnings, financial worth and the value o f their assets in years prior to Warren Buffetts acquisition. picpic 3. How well has Berkshire Hathaway performed? How well has it performed in the add up? What nearly its investment in MidAmerican Energy Holdings? Berkshire Hathaway has become an investing empire.Their enterprise value in 2005 was nearly $520 billion. Taking a look at their current value is no different. According to Berkshire Hathaways most new-fangled 10K report (2010), they had 1,648,000 outstanding shares of class A stock. At the end of 2010 the price of the class A stock was $120,450 per share. If we use the formula for market capitalization we get mart Capitalization = taboostanding shares * share price Market Capitalization = 1,648,000*120,450 Market Capitalization = 198,501,600,000 We then use the 10K to find their funds, cash equivalents and debt for 2010.According to their annual report they had cash and cash equivalents of $2,673,000,000 and a report debt of $6,621,000,000. We then use these numbers to find the current enterprise value Enterprise value = 198,501,600,000-2,673,000,000+6,621,000,000 Enterprise value = 202,449,600,000 These estimates from 2005 and 2010 show us that Berkshire Hathaway did lose some value however they still have an enterprise value of over $200 billion. This shows us that even through the last few years when the United States has been in an scotch recession overall they have remained strong.Using Yahoo Finance we see that there was a sensitive drop in stock A prices in February of 2009 when it reached a low of to the highest degree $78,000 per share. But by the end of 2009, prices rose back to above $100,000 per share and have remained, showing torso and continuing to build shareholder confidence. Berkshire Hathaway has increased its interest in MidAmerican from 88. 6% to 89. 8% since 2005. By doing this it lonesome(prenominal) adds even more value to Berkshire Hathaway as MidAmerican is a acquireing supplier of natural gas for more than 2 . 4 million customers.The investment has certainly paid off as the 2010 annual report showed 1. 13 billion dollars of earnings for Berkshire from MidAmerican. 4. What is your assessment of Berkshires investments in Buffetts Big quadruple American Express, Coca-Cola, Gillette (now part of Procter and venture), and Wells Fargo? With a little more than 150,000,000 shares of American Express, Berkshire Hathaway owns about 12. 6% of the fraternity. It initially live about $1,300,000,000 to invest in these shares. As of today the market value is right around $7,500,000,000.As you can see, Investing in American Express has turned out to be a smart move for Buffet as they have seen over $6. 2 Billion in profit. American Express shows a consistent trend year after year of making a profit and continues to be a safe and attractive purchase. Berkshire owns around 200,000,000 shares of Coca-Cola sexual climax out to be about 8. 6% monomania of the friendship. The cost of these shares was about $1,300,000,000 and the market value of the shares today has fetchn to be almost $13,400,000,000. once more we see a smart investment, with Coca-Cola producing a $12. billion dollar profit for Berkshire. Coca-Cola continues to be a leader in effectively running their funds as it seems their stock prices rises every year. They carry low debt and our consistent meet perfect into the Berkshire mold. Berkshire Hathaway owns close to 73,000,000 shares of Procter and Gamble. These shares are equal to a 2. 6% ownership of Procter and Gamble. When they invested this cost them $464,000,000. Today these shares are worth around $4,800,000,000. Again we see that this investment has worked out in elevate of Buffet and Berkshire Hathaway.Proctor and Gamble carries a low amount of debt and produces a high net income and continues to grow year in and year out making Buffet and other investors very happy shareholders. The last beau monde Wells Fargo, Berkshire has about a 6. 8% ownership o f or roughly holds around 360,000,000 shares. The cost of the Wells Fargo stock to Berkshire was estimated at around $8,000,000,000. In todays market these shares hold a value of about $10,600,000,000. Even though this is a profit of about $2. 6 billion Im non sure if Buffett is extremely happy with this investment.Proctor and Gambles stock price is relatively low giving it ofttimes room to grow however over the last couple of years it has fluctuated quite a bit. Out of the four investments this is definitely the least effective and efficient. 5. From Warren Buffetts perspective, what is the intrinsic value? Why is it accorded such importance? How is it estimated? What are the alternatives to intrinsic value? Why does Buffett reject them? As I already stated, intrinsic value is found by using a companys stock price and their earnings per share.People tend to buy the stocks that they feel are worth more than what the market claims they are worth adding to the nonion of a companys intrinsic value. Warren Buffet obviously does more than more than the average person when he chooses stocks to invest in as we can see from the amount of money he and Berkshire Hathaway have. When deciding whether or not to invest in a company he looks at the return on equity of a company to see the consistency of a companys implementation and how much equity they are able to generate for their shareholders. Buffet performs this calculation year after year to be sure that the company is consistent.Next, he looks at the companys debt to equity ratio to be sure that the company is avoiding large amounts of debt. no(prenominal) of the companies he invests in have higher liabilities than assets as he views that debt in large amounts is a bad thing. In order for him to be spontaneous to invest he must see that the company is or go forth be highly profitable for years to come. If the company hasnt been publically traded for at least 10 years more times than not, he wont even consid er investing. He does not believe in short- destination success he claims that in the short-term, the market is a popularity contest. He chooses stocks by feel at the overall ability and likely of a company rather than how they perform in the short-term ignoring the provision/demand attraction. When Buffet considers companies for the semipermanent, he looks at them more as an owner than a shareholder pertain with receiving capital gains. He is concerned with the idiosyncratic company and their ability to make money over the long-term. He prefers to act as almost an owner and less of a shareholder concerned with receiving capital gains. 6. Critically assess Buffetts investment philosophy. Be ready to identify points where you agree and disagree with him. . Economic public, not accounting reality. When sounding at a business, Warren Buffet looks at the economic reality as contrasted to the accounting reality. Accounting reality looks at a company using the generally accepted a ccounting principles (GAAP) to determine the value of the company. GAAP covers revenue recognition, balance sheet item classification, and outstanding share measurements. Economic reality is broader than accounting reality and includes intangible assets, such as patents, trademarks, special managerial expertise, and reputation of the company.When expression at the value of a company looking at the economic reality makes more awareness because it includes intangible assets that cant be computed, but are an meaning(a) factor for the value of a company. For example, the reputation of a company cannot be quantified, but reputation is valuable in the sense that a company with a good reputation will draw more favor from customers and investors while a company with a bad reputation will drive away customers and potential investors. 2. The cost of lost luck. This compares an investment opportunity against the next best alternative.What this means is that when making a decision as to whet her to invest in one company or the other, choices are made as either/or decisions rather than yes/no. By looking at companies this way, Buffet is able to see how investing in one company would compare by looking at the potential returns on common stock from investing in another company. 3. Value beingness time is money. In terms of value creation, Buffet believes that intrinsic value is a better indication of future expected performance as opposed to using book value.Intrinsic value is the discounted value of the cash that can be taken out of a business during its be life while, book value is the number of total assets a company has minus intangible assets and liabilities. What makes the intrinsic value a better indicator of future expected performance is the fact that book value may not reflect the economic reality because depending on the relationship amongst expected returns and the discount rate value can either be gained or lost. What this means is that the estimates of th e return on equity can drastically change whether or not a company is seen as valuable. . visor performance by gain in intrinsic value. Performance is thrifty by gain in intrinsic value as opposed to accounting profit. Warren Buffet says that Berkshires performance is not mensural by the size of the company, but by the companies per share progress. The gain of intrinsic value is modeled as the value added by a business compared to the cost for the use of capital in that business. Other forms of measuring performance look at the ability to earn returns in excess of the cost of capital.By looking at per share progress, it is easier to see growth in a company than by looking at how large it is because a large company does not mean that it is a profitable company or that their growth is related to an increase in profit, if anything their growth could just be related to a large number of acquisitions. 5. Risk and discount rates. When looking at risk and discount rates, instead of usin g the traditional capital asset pricing model (CAPM) to estimate discount rates, Buffet chooses to use the rate of return on the long term exchequer bond to discount cash flows.The CAPM model of estimating discount rates adds in a risk premium to the long term risk slack rate of return, while Buffets method avoids risk tout ensemble and uses a risk-free discount rate. The reason behind this is that Buffet likes to invest in companies with predictable and stable earnings and avoid financing his firm with debt. Overall this is a smart strategy because if there was ever an economic crisis, like there was a few years ago, a company not financed with debt and low risk would pull through better than a company who had many an(prenominal) high risk investments and was financed by debt. . Diversification. Buffets view on diversification is that it is an unnecessary precaution, and that instead of inventing in many stocks to avoid risk, it would be more profitable to wait for one special company to invest in. The logic behind this makes sense, but the execution is rugged because of the fact that the stock market is so volatile and investors do not have all of the entropy necessary to make an informed decision with 100% confidence that there investment will pay off.There is overly the fact that some investment opportunities may be bemused if companies wait too long to find that one exceptional company to invest in. 7. Investing behavior should be driven by information, analysis, and self-discipline, not by emotion or hunch. Buffet believes that stock prices have become unreliable measure of intrinsic value of a company because they are influenced by the fear and greed of investors. He also doesnt believe in the efficient markets hypothesis (EMH), which states that stock prices are fair in reflecting what was known about a company.Buffet disapproves of this theory because he believes that stock prices do not accurately portray the intrinsic value of the company an d believing in this theory prevents investors from seeing the bigger effigy on how the stock market really works. It is important to use information and analysis of companies when making an investment decision because you cant ceaselessly trust the information that is given and the information given may not give the whole picture on the value of a company. 8. coalescence of agents and owners. When it comes to investing Buffet believes that an alignment of agents and owners is important.This means that the needs of the company are that of the needs of the shareholders. Keeping the needs of the shareholders first is important to having a successful business. If shareholders are happy, businesses can expect to receive a good fork out of cash flow from investments. Shareholder wealth can also lead to more profits in the company as well as the company will be focused on long term profit maximization and not just the short term. 7. Should Berkshire Hathaways shareholders punt the acq uisition of PacifiCorp?While looking at PacifiCorps Consolidated pecuniary Statement (Exhibit 7) PacifiCorps income from operations onward tax fits the criteria 1 presented in Berkshire Hathaways acquisition criteria (Exhibit 8) by having more than $75 million in pretax earnings, (PacifiCorp has $4. 2 billion. ) However, they do carry about $3. 92 billion in long-term debt, which fails criteria 3 in Exhibit 8. They do however, fill criteria 2 in Exhibit 8 by bringing in about $3. 6 million more in net income from 2005 to 2004 (Exhibit 7) although more information would be needed to see if PacifiCorp was consistently earning a profit.Compared to 6 other companies in the same field in Exhibit 9, PacifiCorp doesnt seem like the best investment. PacifiCorp is number 2 for total assets, but also number 2 for total liabilities. This goes in hand with their total long-term debt as they are also number 2, but for short-term debt they are number 5. For total debt they are number 2. For to tal revenue before taxes, PacifiCorp is number 4. What these numbers mean is that compared to other companies, it seems that PacifiCorp is a more risky investment. PacifiCorp generally has more debt and is not bringing in as much revenue, though they still have positive growth in net income.Another source of concern is that PacifiCorp has very low earnings per share with a EPS of just $0. 81 with the next competitor having an EPS of $1. 42 (Exhibit 10). From looking at the data presented in the tables, shareholders should not endorse the acquisition of PacifiCorp because the company fails several criteria that were established by Berkshire Hathaway as guidelines for acquiring corporations, and it is unlikely that the acquisition will result in the 15% annual growth of the intrinsic value of the firm.