[Solved] warren buffet 2005 case study

Net Present Value for the Market Value

The actual value of a security, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often dificult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i. e. what investors are willing to pay for the company) and intrinsic value is the value (i. e. what the company is really worth).

Market reacted positively to the acquisition. This is shown by the increase in share price by 2. % and gain in market value of $2. 55 billion for Berkshire Hathaway’s Class A stock. Scottish Power’s share price also jumped 6. 28% on the news; the S & P 500 Composite Index closed up 0. 02%. This shows consumers’ confidence in the company in the long-term. The $2. 55 billion gain in Berkshire’s market value of equity imply that the stock was undervalued and went up to its intrinsic value. Intrinsic value = 5. 122 Add calculation to Powerpoint. Total share value = 1. 06 billion or 837. 41 per share 2. Low= $28. 68 High = $34. 58

Berkshire Cotton Manufacturing was a large success at it’s inception in 1889. Becoming the United States leading textile producers, it quickly accounted for 25% of the US’s cotton textile production. In 1955, Berkshire merged with Hathaway Manufacturing. Due to rising economic changes, the company started a secular decline. Over the next 20 years, with the guidance of Buffet, Berkshire Hathaway would become a financial empire. After acquiring different facets of business, Berkshire Hathaway has been able to consistently increase the company’s overall value. Currently, Berkshire is performing well. Share PriceS&P 1977 = $102$96 2005 = $85,500$1,194

Berkshire completely dominated the market. Annual Berkshire was 24%, while the annual average total return of all stocks was 10. 5%. We can see that with these percentages, Berkshire more than double its return (2. 29%).

Berkshire invested $3. 83 billion in the four through multiple transactions between May 1988 and October 2003; on a composite basis, Berkshire’s dollar-weighted purchase date was July 1992. By year-end 2004, Berkshire held these interests, on a weighted basis, for about 12. 5 years. The Big Four companies are highly diversified.

Intrinsic value is “ irrespective of whether a business grows or doesn’t, displays volatility or smoothness in earnings, or carries a high price or low in relation to its current earnings and book value, the investment shown by the discounted-flows-of-cash calculation to the cheapest is the one that the investor should purchase. He defined intrinsic value as he discounted value of the cash that can be taken out of a business during its remaining life. Basically, the intrinsic value was not just based on accounting methods, but of the intangible assets of the company factored into its true value.

Intrinsic value is all important and is the only logical way to evaluate the relative attractiveness of investments and businesses,. Book value and market value; Accounting reality (GAAP). He rejects them because accounting consequences do not influence our operating or capital allocation process. GAAP also does not measure the value of intangible assets.

Warren Buffet was brilliant and his investment philosophies made a lot of sense, however there are two that we do not agree with. One being his philosophy on diversification and not investing based on a hunch.

Buffet disagreed with conventional wisdom that investors should hold a broad portfolio of stocks in order to shed company-specific risks. In his view, investors typically purchased far too many stocks rather than waiting for one exceptional company. We don’t agree with that philosophy because diversification does not necessarily mean your ignorant. It just means you may be more risk averse than others. Or you don’t have a lot of purchasing power and diversifying helps lower your risk so you don’t lose all your resources quickly.

Also, diversification can help if one market plummets, another market succeeds, therefore it’s a win win situation. His philosophy on information, analysis, and self-discipline, is one we disagree with.

Yes, the shareholders should endorse the acquisition of PacificCorp because it not only is adding value to the company, it is diversifying Berkshire’s services and products, therefore protecting their assets. Also, it is a good sign of growth because the shares increased in value the very first day as a result of the announcement. *Put Market/Book value on this slide*

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