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Butler Lumber Company

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GEICO’s intrinsic value was larger than purchase value, Berkshire Hathaway’s intrinsic value increased, so the stock price went up. The $718 gain in Berkshire’s market value implied that investors thought that: GEICO was underestimated, Berkshire bought it with a cheap price. C) Total dividend is much larger than purchase price. In all, it is a super good investment. (3) About early investment in GEICO: (4) Convertible preferred stocks: A) Interest rates are very high (compare to the yield of the 30 year U.S. Treasury bond: 6.86%): about 9% on average. B) Most convertible preferred stocks’ market values are larger than par values. In all, they are very good investments. 3、 (3) Estimated method Discounted free flows of cash of the business: We estimate the future free cash flow of every year, and specify the discount rate, the discount rate maybe the long term bond’s yield or the average cost of equity. Then we can calculate the present value of the business. (4) Alternatives to intrinsic value are market value and book value. (5) Why Buffett rejects book value and market value: Book value only reflects the past history of a business’s net asset, it does not mean the business’s future earnings. Market value is not stable, it may be larger or smaller than the intrinsic value greatly. Range of possible intrinsic values for GEICO: 125/(1+ 11%)^5) = 74.18 Why the estimated cost of equity is so high? If we use 30 year Are the Forecast stock prices in 2000 right (from 90 to 120)? (3) Are forecast about dividends of GEICO from 1996 to 2000 right or reasonable? (1)Invest on super companies which have competitive advantage in their industry. (2) Margin of safety: the purchase price is much lower than the intrinsic value. (5) Using Discount-Cash-Flow method to calculate the intrinsic value.

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