Purinex, Inc Warren Buffett Essay

1. What is the likely concocting of the changes in stock expenditure for Berkshire Hathaway and economical Power plc on the day of the acquisition announcement? Specifically, what does the $2.55 billion collect in Berkshires merchandise entertain of equity imply close the intrinsic shelter of Pacifi pot?Answer1 The increase in the stock charge of Scottish Power plc and Berkshire Hathaway luff a marketplace approval for the acquisition and created pass judgment for both buyers and conducters.Answer2 a. the workable meaning of the changes in stock legal injury is im roveable to the fact that the raft created regard as for both buyers and sellers Berkshire was more than diversified subsequently the acquisition.b. The $2.55 billion gain in Berkshires market honour of equity implied that the intrinsic value of PacifiCorp was superb because it fell within the die hard of competitors base on the undermenti nonpareild calculations$2.55 billion / 312/18 million = $8. 17 Berkshire is willing to pay this premium for each sh atomic number 18 of PacifiCorp5.1 billion / 312.18 million = $16.30 per share of PacifiCorp$8.17 + 16.30 = $24.47 ( touch video display 9) Answer3 The possible explanations in the change in stock price for Berkshire would be for a duette of reasons. One of them is that investors invest based on the behavioral finance hypothesis which implies that their enthronisations are driven by psycho uniform factors. These factors would be that conceptualise that Mr. furbish is the guru of enthronization, therefore he is right and it must be a really good enthronisation.Moreover looking at the financial statements of march 2005 we see that the book value of PacifiCorp = 3377.1 Billions/312.12 million shares =$10.82 per share. However, the increase of 2.17 billion dollars at the day of the announcements of Berkshire implies that that accepted value of PacifiCorp should be higher if we divide the 2.17 billions /312.12 million shar es we capture that the PacifiCorp share should wee-wee a $ 6.95 dollar value higher. 2. Based on the multiples for comparable regulated utilities, what is the range of possible set for PacifiCorp? What questions might you render ab bulge out this range?Answer1 a. we find the range of possible values for PacifiCorp in Exhibit 10.i. Revenue median(prenominal) of $6.252 Billion, mean of $6.584 Billion.ii. EBIT median of $8.775 Billion, mean of $9.289 Billion.iii. EBITDA median of $9.023 Billion, mean of $9.076 Billion.iv. web Income median of $7.596 Billion, mean of $7.553 Billion.v. EPS median of $4.277 Billion, and a mean of $4.308 Billion.vi. Book value median of $5.904 Billion, mean of $5.678 Billion.b. Question about revenue the implied value of PacifiCorp is giving impractical results for range of revenue as equalised to EBIT, EBITDA, & Net income (Expected Revenue EBITDA EBIT NI).Answer2Alliant E. CorpLow price P/E =23.50/1.42=16.55 high-pitched price P/E =28.80/1.42= 20.28Cinergy CorpLow price P/E =34.90/1.42 =16.23High price P/E =42.60/2.15=19.81NSTARLow price P/E =22.70/1,79=12.75High price P/E =27.20/1.78 =15.28SCANA CorpLow price P/E =32.80/2.34=14.02High price P/E =39.70/2.34 =16.93WECLow price P/E =29.50/2.62=11.26High price P/E =34.60/2.62 =13.21Industry median(a) low price P/E=14.20Industry average high price P/E =17.11PacifiCorp EPS =0.81 investment firm price of PacifiCorp= EPS x (P/E industry)Range of PacifiCorp possible valuesLow price 0.8114.20= $11.50High price 0.8117.11=$13.86Possible value for PacifiCorp utilise EBITDATotal value Company =market value + electronic geltwork debt commercialise multiple =total value phoner /EBITDAEBITDAAlliant E. Corp= 7.45xNSTAR 7.53xSCANA Corp 9.25xWEC 8.47x middling =8.18xTotal value of company = Market multiple X EBITDAPacifiCorps EBITDA=1093.30Market multiple =8.1Value of PacifiCorp = 8.181093.30 =8,943.19 million dollars 3. Assess the bid for PacifiCorp. How does it compare with the firm s intrinsic value? As an alternative, the instructor could adumbrate that students perform a simple discounted exchange-flow (DCF) analysis.Answer1 If you use CAPM for the simple DCF analysis K=rf+B(rm-rt)rf =5.762K=5.762+.75(10.5-5.762)B=.75=9.32%=Discount raterm=10.5$5.1/(1+.0932)=$4.76 = it is in range of the rest of the comparable firms.Answer24. How swell up has Berkshire Hathaway performed? How well has it performed in the aggregate? What about its investment in MidAmerican Energy Holdings?Answer1 Overall, Berkshire Hathaway has performed brilliantly in the drop dead 40 socio-economic classs. Berkshires class A shares digest been among the highest-priced shares on the New York Stock Exchange, in part because they have never had a stock flare up and never paid a dividend, retaining corporate actualizeings on its relief sheet in a manner that is impermissible for private investors and vulgar funds.The company averaged an annual growth in book value of 20.3% to itsshare holders for the last 40 years.Answer2 It has performed actually well. Berkshire Hathaway has consistently outperformed the market since its inception in 1965. In 1977, the firms year end closing share price was $107 on May 24, 2005 the closing price on its Class A shares reached $85, cholecalciferol. Berkshire has had an annual increase of riches of 24% since 1965, which is more than double the 10.5% of the average increase for other large stocks. It started out with a decline due to inflation, technological change, and intensifying competition from foreign competitors, entirely has recuperated well after closing the textile side of their lineage.Berkshire Hathaway had recently been performing below S&P 500 Index match to Exhibit 1, from April 2005 to May 2005. Scottish Power had consistently outperformed the S&P 500 Index from marchland to May 2005. This probably was one aspect that attracted Berkshire to purchase PacifiCorp.We imagine that it was a good investment. In 2002 t hey owned 9.9% of the voting invade and 83.7% of the economic interest in the equity of MidAmerican. This allows them to have a major stake in the company without violating utility laws, which has proven to be successful for them. According to Exhibit 6, MidAmerican Holdings had a net earnings of 170 million in 2004, but compared to 2003 net earnings of 416 million, MidAmerican had a net handout from 2003-2004. Acquiring PacifiCorp would bring home the bacon much exacted new, more profitable investments to raise their net income in 2005.Answer3Performance of Berkshire since 1977 to 2005PV=102FV=85500N=28I=34% S & P performance since 1977 to 2005PV =96FV=1192N=28I=9.42Berkshire has outperformed S & P by 24.58%5. What is your assessment of Berkshires investments in blowts abundant 4 American Express, Coca-Cola, Gillette, and Wells Fargo?Answer1 They invested in well established and successful firms. They put a lot of money up front for these investments, but since have made sub stantial gains for their investment. The total exist to Berkshires investment in the Big 4 was $3.832 Billion, but the market value of their investment was $24.681 Billion. This means that Berkshires current gain on their investment in the big 4 is $20.849 Billion. Their gain is 5.44 generation their investment I would have to say that these were real well thought out and successful investments.Answer2 burnishs orgasm of investments is based on the fundamental analysis of the company itself. It is based on simplicity and consistency of its operation history, attractiveness of long term prospects, theatrical role of management and firms capacity to create value. The big foursome, Coca-Cola, American Express, Gillette and Wells Fargo have all these characteristics. For instance Coca- Cola has been in craft since 1919(Reuters). It is a multinational with the biggest market share worldwide. Coca-Colas finished swallow products bearing its trademarks are sold in more than 200 co untries (reuters.com). Buffet looks at what the consumers are looking for and what the general economic trend is at that time and what it will be over time. He researches a company as a whole and looks at what masses want and what people are transitioning into in the future. For instance or so of his investments in the big four were done in 1992. During these 13 years we can see how well the big four have performed compare with the S& P 500S & P 500At January 1992 adjusted to dividends and splits =408.78At celestial latitude 2005 adjusted to dividends and splits =1248.29n=13Return =8.96%American Express.Price at January 1992 adjusted to dividends and splits =4.02Price at December 2005 adjusted to dividends and splits =49.68N= 13Return =21.34%Wells FargoPrice at January 1992 adjusted to dividends and splits =2.69Price at December 2005 adjusted to dividends and splits =28.25N=13Return =19.82%Coca-ColaPrice at January 1992 adjusted to dividends and split =14.5Price at December 2005 a djusted to dividends and splits 37.50N=13Return =7.50%6. From Warren Buffetts perspective, what is the intrinsic value? wherefore is it accorded such importance? How is it estimated? What are the alternatives to intrinsic value? Why does Buffett slump them?Answer1 a. the discounted value of the cash that can be taken out of a business during its remaining life. Intrinsic value is per-share progress. Buffett assessed intrinsic value as the present value of future expected performance.b. Because if focuses on aptitude to earn returns in excess of the cost of capital, not accounting profit. Only logical way is to evaluate the relative attractiveness.c. The gain in intrinsic value could be modeled as the value added by a business above and beyond the charge for the use of capital in that business.d. story profit, performance of Berkshire by its size, consolidated reported earningse. Accounting creation was conservative, backward looking, and governed by GAAP (measures in terms of net profit). enthronement decisions should be based on economic humans. This includes intangible assets such as patents,trademarks, special managerial expertise, reputation, etc.Answer2 The definition of intrinsic value according to Mr. Buffet is the present value of all future expected cash flows or performance. The measurements of intrinsic value are focused on the ability of the company to earn a return in excess of the cost of capital including the opportunity cost. Intrinsic value is not based only on the net profit.Alternatives to intrinsic value1) Accounting profit. Mr. Buffet believes that the true value of a company is based on its intrinsic value not on its accounting profit. Financial statements prepared by accountants are conformed rough rules that do not adequately represent the economic reality of business.2) Technical analysis. Mr. Buffet rejects the technical analysis that attempts to predict the stock prices based on momentum of trends. He believes in long term investment.3) cost-effective market hypothesis. Mr. Buffet rejects the efficient market hypothesis theory (EHM). He believes that there are opportunities out there. Investing should be based on learning analysis of the company. 7. Critically assess Buffetts investment school of thought. Be prepared to identify points where you agree and disagree with him.Answer1 Warren Buffett has a very simple method of investment dodging compared to other investors. Buffetts philosophy is defined in 8 instalments. We will discuss whether we agree or disagree with each one individually. We agree with Buffetts first fraction of analyzing economic reality of investments. Most investors focus on financial statements and net profit, but dont take into consideration intangible assets such as management experience and patents.We also agree with Buffetts indorsement element of lost opportunity cost comparison. By analyzing expected returns of an investment compared to the rate of return of apply t hat same investment money in another investment, Buffett takes a simple idea that all(prenominal)one uses in almost every decision, andapplies it to a much more complicated investment strategy. Everyone weighs the alternative when making a decision, whether that decision is a choice of a coffee or a coke or something more complex like a college education versus not getting an education.Buffett uses the third element of intrinsic value preferably of book value or historic data to determine his investment choices. We agree with this element, but do believe a combination of the two methods would work better to show historically how the company has performed, and how much that company will be worth in the future. The rate of return reflects more of the economic value of an investment.In the one-fourth element, Buffett measures performance by per share basis. We do agree with his reasoning for using this method, but we think overall performance should be measured as well to show a b etter figure of what the whole is worth compared to the parts.The fifth element is one that we dont agree with. Buffett uses a 30 year U.S. Treasury Bond Rate of Return instead of the traditional CAPM rate, because he believes that his investments are so solid, they dont need risk factored in. We disagree with his choice for rate of return because all investments have a degree of risk, and return should be factored according to that level of risk. Buffett not believing in risk is like someone not believing we breathe air. notwithstanding though we cant see it, it is steady there.The sixth element is also a point of disagreement for me. Buffett says he doesnt believe in diversification of investments, even stating that diversification is considered certificate against ignorance. What Buffett does not realize is that by saying he does not believe in diversification, he is being a hypocrite. Berkshire Hathaway itself is a massively respective(a) company with several subsidiaries an d holdings in many different industries from apparel to energy. Buffett whitethorn own most of his stock in his own company, but he knows by diversifying Berkshire, he will avoid adding more risk, which is exactly the strategy that is used by other investors when diversifying their stocks.We agree with the seventh element that investment decisions should be made by doing proper research on information about the company, and not by following an anonymous tip or a gut feeling.Finally, we agree with the eighth element that a firms management and shareholders should have the same goals for the firm. Management should have most of their wealth in company stock so as to set the shareholders better in day-to-day decision making that affects the value of their investments.Answer2 Mr. Buffet does not believe in diversification. We believe that diversification helps in times like the one that the market is having right know. For instance stock value of American Express in the last year has r anged from $53 a year ago to $15 dollars this week resulting in a loss of 70 % and also the market value of Wells Fargo is down by 65% (yahoo finance). If you compare those two companies with the S & P during the last year it is only down by 40%. This also means that market risk is still there. We believe that Mr. Buffet has not had a fleck in the economy such as the one that the country is having now. Even he, the guru of investments is losing money, so we know that the risk is there.We agree on his philosophy on investing behavior. It should not be driven by emotion or sleep with but should be a well thought out plan that came about by information, analysis and self-discipline. If you go by hunch or emotion then anyone can work you up and sell you the worst deal of your life, but make you think it is the best one you will ever get.We agree with his belief on the alignment of owners and investors. It is forever a good thing when the owner has more than 50% of his net worth inves ted in the company because the goal would definitely be increase shareholder wealth. 8. Should Berkshire Hathaways shareholders endorse the acquisition of PacifiCorp?Answer1 Yes, PacifiCorp will add around $250 million in net income forMidAmerican Holdings if PacifiCorp keeps at its same net income conventionality of the last two years. This added net income will increase shareholder wealth in Berkshire Hathaway and provide a stable long term investment for the future. Also, since PacifiCorps intrinsic value is comparable to the industry, Berkshire is not adding much more risk to their portfolio. Berkshire should look at adding more of these type safer investments to their portfolio.Answer2 The Berkshire Hathaway shareholders should endorse the acquisition of PacifiCorp. It took a while for Mr. Buffet to finally invest their cash equivalents because he was looking for an elephant which is a company that makes significant gains. Factors that make it a good acquisition include the fa ct that PacifiCorp is a low-cost energy producer but has the biggest market share among the energy companies which is 1.6 million customers divided among 6 states plus the intrinsic value of the company is much higher than the market value of PacifiCorp.