Purinex, Inc Warren Buffett Essay

1. What is the practical destineing of the changes in stock determine for Berkshire Hathaway and Scotch Power plc on the day of the acquisition announcement? Specifically, what does the $2.55 billion gain in Berkshires commercialize apprise of equity imply ab break through the inner evaluate of PacifiCorp?Answer1 The increase in the stock price of Scottish Power plc and Berkshire Hathaway indicate a grocery store approval for the acquisition and created value for both buyers and sellers.Answer2 a. the realistic stiffing of the changes in stock price is due to the fact that the deal created value for both buyers and sellers Berkshire was often than(prenominal) diversified after(prenominal) the acquisition.b. The $2.55 billion gain in Berkshires merchandise value of equity implied that the intrinsic value of PacifiCorp was good because it fell within the range of competitors establish on the following calculations$2.55 billion / 312/18 billion = $8.17 Berkshire is giveing to pay this premium for each share of PacifiCorp5.1 billion / 312.18 gazillion = $16.30 per share of PacifiCorp$8.17 + 16.30 = $24.47 ( put cardinal across reveal 9) Answer3 The possible explanations in the change in stock price for Berkshire would be for a couple of reasons. bingle of them is that investors invest establish on the behavioral finance theory which implies that their investment fundss are driven by psychological factors. These factors would be that believing that Mr. dinge is the guru of investment, therefore he is even out and it must be a truly good investment.Moreover looking at the financial statements of march 2005 we see that the ready got 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 true value of PacifiCorp should be higher if we divide the 2.17 billions /312.12 million shares we beget that the PacifiCo rp share should have a $ 6.95 dollar value higher. 2. Based on the mul spinning toples for comparable correct utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range?Answer1 a. we find the range of possible values for PacifiCorp in Exhibit 10.i. Revenue median 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. endure(a) 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 compared to EBIT, EBITDA, & Net income (Expected Revenue EBITDA EBIT NI).Answer2Alliant E. Corp scummy price P/E =23.50/1.42=16.55High price P/E =28.80/1.42=20.28Cinergy CorpLow price P/E =34.90/1.42 =16.23 High 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 average low price P/E=14.20Industry average high price P/E =17.11PacifiCorp EPS =0.81 product line 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 employ EBITDATotal value Company =market value + send away debtMarket multiple =total value confederacy /EBITDAEBITDAAlliant E. Corp= 7.45xNSTAR 7.53xSCANA Corp 9.25xWEC 8.47xAverage =8.18xTotal value of fellowship = 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 firms intrinsic value? As an alternative, the instructor could suggest th at students perform a fair discounted cash-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 equipoise of the comparable firms.Answer24. How well 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 brightly in the stand firm 40 years. Berkshires class A shares have been among the highest-priced shares on the New York Stock Exchange, in part because they have never had a stock split and never paid a dividend, retaining corporate earnings on its balance sheet in a manner that is impermissible for common soldier investors and mutual funds.The company averaged an yearly growth in book value of 20.3% to itsshareholders for the last 40 years.Answer2 It has performed in truth well. Berkshire Hathaway has consiste ntly outperformed the market since its inception in 1965. In 1977, the firms year end ratiocination share price was $107 on May 24, 2005 the closing price on its Class A shares reached $85,500. Berkshire has had an annual increase of wealth of 24% since 1965, which is more than double the 10.5% of the average increase for new(prenominal) large stocks. It started out with a decline due to inflation, technological change, and intensifying competition from foreign competitors, however has recuperated well after closing the textile side of their business.Berkshire Hathaway had recently been performing below S&P 500 business leader according to Exhibit 1, from April 2005 to May 2005. Scottish Power had consistently outperformed the S&P 500 forefinger from March to May 2005. This probably was one aspect that attracted Berkshire to purchase PacifiCorp.We take that it was a good investment. In 2002 they owned 9.9% of the voting interest and 83.7% of the economic interest in the equity of MidAmerican. This allows them to have a study 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 loss from 2003-2004. Acquiring PacifiCorp would supply a good deal needed new, more profitable investments to raise their net income in 2005.Answer3Performance of Berkshire since 1977 to 2005PV=102FV=85500N=28I=34% S & P functioning 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 Buffetts good-looking Four American Express, Coca-Cola, Gillette, and Wells Fargo?Answer1 They invested in well established and successful firms. They put a circle of nones up front for these investments, but since have made substantial gains for their investment. The total cost 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 veritable gain on their investment in the hazardy 4 is $20.849 Billion. Their gain is 5.44 meters their investment I would have to say that these were very well thought out and successful investments.Answer2 Buffets nestle of investments is based on the fundamental analysis of the company itself. It is based on simplicity and consistency of its operating room history, attractiveness of long term prospects, quality of solicitude and firms capacity to create value. The big cardinal, Coca-Cola, American Express, Gillette and Wells Fargo have all these characteristics. For instance Coca- Cola has been in business since 1919(Reuters). It is a transnational with the biggest market share worldwide. Coca-Colas finished beverage products bearing its trademarks are sold in more than 200 countries (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 people want and what people are transitioning into in the future. For instance most 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 familiarised to dividends and splits =408.78At December 2005 alter to dividends and splits =1248.29n=13Return =8.96%American Express. outlay 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 adjusted to dividends and splits 37.50N=13Return =7.50%6. From Warren Buffetts perspective, w hat is the intrinsic value? Why is it accorded such(prenominal) importance? How is it estimated? What are the alternatives to intrinsic value? Why does Buffett forswear them?Answer1 a. the discounted value of the cash that can be taken out of a business during its remaining life. inalienable value is per-share progress. Buffett assessed intrinsic value as the present value of future expected performance.b. Because if managementes on faculty to earn returns in excess of the cost of capital, not accounting profit. Only logical way is to valuate 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. account statement profit, performance of Berkshire by its size, consolidated reported earningse. Accounting reality was conservative, backward looking, and governed by GAAP (measures in terms of net profit). Investment decisions should be based on economic reali ty. 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 fortune cost. Intrinsic value is not based only on the net profit.Alternatives to intrinsic value1) Accounting profit. Mr. Buffet reckons 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 around 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) Efficient market hypothesis. Mr. Buffet rejects the high-oc tane market hypothesis theory (EHM). He believes that there are opportunities out there. Investing should be based on information analysis of the company. 7. Critically assess Buffetts investment philosophy. Be prepared to list points where you agree and discord with him.Answer1 Warren Buffett has a very simple method of investment strategy compared to other investors. Buffetts philosophy is defined in 8 elements. We will discuss whether we agree or disagree with each one individually. We agree with Buffetts first element 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 second element of lost fortune cost comparison. By analyzing expected returns of an investment compared to the rate of return of using that same investment money in another investment, Buffett takes a simple idea that everyone uses in al most every decision, andapplies it to a much more complex 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 standardised a college education versus not getting an education.Buffett uses the third element of intrinsic value instead of book value or historical 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 fourth element, Buffett measures performance by per share basis. We do agree with his reasoning for using this method, but we recollect overall performance should be measured as well to show a better send off of what the whole is worth compared to the parts.The fifth element is one that we dont agree wi th. 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. Even though we cant see it, it is lock 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 protection 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 diverse company with several subsidiaries and holdings in many different industries from apparel to energy. Buffett may 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 serve 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 ranged 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% (y ahoo 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 situation 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 invest 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 connective of owners and investors. It is always a good thing when the owner has more than 50% of his net worth invested in the company because the goal would definitely be increasing shareholder wealth. 8. Should Berkshire Hathaways shareholders endors e 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 pattern of the last two years. This added net income will increase shareholder wealth in Berkshire Hathaway and provide a permanent 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 fact 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.