...Case 1: Warren Buffett 1995 Question 1: Warren Buffett's (Buffett) track record as a value investor and sheer financial strength has earned him an incredibly valuable reputation within the financial industry. Being an anomaly in the investment world; when he talks – the market follows. This is noticeably seen in the increase in equity of $718 million. ------------------------------------------------- Question 2: GEICO Outstanding shares April 30, 1995: 67.89 million, of which 34.22 million owned and 33.67 million purchased at $70; total price $2.3 billion. A Capital Asset Pricing Model (CAPM) derived cost of equity equaled 10.99% percent via a risk-free rate of 6.86 percent, a beta of 0.75, and an equity risk premium of 5.5 percent. k = 6.86 + 0.75 ((5.5)) = 10.99% Using Value Line’s forecast & the above discount rate and share information: the following low end & high end NPV are calculated: Low end: -$335.57 High end: $389.89 For methodology in calculation of intrinsic value refer to ‘1995-Question 2’ in the accompanying “excel“spreadsheet for the analysis. Using Value lines cost of equity; the investment yields a negative Net Present Value (NPV) on the low end. The investment will not add value to the firm and the acquisition of GEICO doesn’t seem to be a good one. The high end range yields a positive NPV showing the investment rather is rather a prudent one. The discount rate used is highly subjective and is influenced by the risk premiums chosen...
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...Case Study of Warren E. Buffet In 1995 Berkshire Hathaway has made a bid for the shares of GEICO. This report reviews the offer made by Warren Buffet and will try to prove that the acquisition of GEICO will serve the long-term goal of Berkshire Hathaway and the bid price was appropriate. Furthermore, it will explain what may have caused for the share price increase for Berkshire Hathaway at the announcement of GEICO’s acquisition. Would the GEICO acquisition serve the long-term goals of Berkshire Hathaway? In 1976, Warren Buffet paid $45.7 million for 34.25 shares of GEICO. Review of GEICO’s historical dividends shows that GEICO has been a very profitable investment for Berkshire Hathaway. The growth rate for 1994 is a sharp increase, but even if the growth rate for 1994 is not considered, GEICO’s historical increase in dividends has been considerably high so that acquisition of GEICO will serve the long-term goals of Berkshire Hathaway. What might account for the share price increase for Berkshire Hathaway at the announcement? Review of Warren Buffet’s historical investment success might explain the increase in share price for Berkshire Hathaway at the announcement. Given that he has had a good track record, it is expected that shareholders respond positively. In 1977, the price of Berkshire Hathaway was $89 closing at $25,400 by 1995, an unparalleled annual growth of 37.7%. In comparison, the growth rate of the S&P...
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...White Paper: Examining Berkshire Hathaway’s 1995 Purchase of GEICO Insurance Tim Glowa Tim@Glowa.ca September 12, 2001 © 2001 Tim Glowa Berkshire Hathaway and GEICO Insurance © 2001 Tim Glowa September 12, 2001 -2- Table of contents Executive Summary.................................................................................................... 3 Introduction................................................................................................................. 4 Review of the case: Berkshire Hathaway purchasing GEICO.................................... 4 Strategic Outcome....................................................................................................... 7 Finance........................................................................................................................ 7 Time Value of Money................................................................................................. 8 Assessment of the GEICO purchase........................................................................... 8 Time value of money ................................................................................................ 11 An examination of the GEICO acquisition in hindsight........................................... 13 Limitations of Discounted Cash Flow ...................................................................... 15 Limitations of this Analysis....................................................
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...Case 1 Warren E. Buffett, 1995 How is Berkshire Hathaway’s business composition from Exhibit 1 different or similar today? Be specific. Provide an overall statement to describe Berkshire Hathaway’s performance over time compared to the S&P 500. Can you discern a trend in the investment decisions of Mr. Buffett and are his decisions consistent with the principals learned from his mentor Dr. Graham? Based on the types of company’s that BK now owns, have the Acquisition Criteria been held to, modified, expanded upon? Is there something more to his theories? Comment on the quote “all you need to know to become a successful investor is two courses, (1) A course on how to value companies and (2) a course on human behavior”. How does Buffet’s philosophy statements on page 19 and 20 compare to what you have learned so far in your other management classes or personal experiences? What does the advice that Buffet gave the University of Florida students mean to you? Select 2 quotes on page 22 and comment on why they are meaningful to you. How has Mr. Buffet taken advantage of the recession of the past 4 years? Comment on Mr. Buffet’s quote “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. By use of research, how has Buffet and his company applied this statement with their current actions? Case 2 INTUIT Your textbook on page 19 makes reference to the fact that most entrepreneurs learn...
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...this course, students should understand and be able to do the following: 1. Estimate the cost of capital for corporate investment decisions; 2. Make corporate investment decisions using discounted cash flow method; 3. Manage working capital and corporate long-term growth. Supplemental Learning Outcomes: While not assessed, it is anticipated that students will develop the following: 4. Understand the importance of corporate governance for achieving long-term corporate financial objectives and valuation; 5. Understand some unique features of Chinese capital markets. TEACHING AND LEARNING The course will be a mixture of lectures, case discussions and individual and group practices. Students are expected to do the following. 1. 2. 3. 4. Read the assigned textbook chapters BEFORE the classes. Prepare for cases BEFORE case discussions, and submit case work as required. Do homework. Actively engage in class discussions. METHOD AND WEIGHTING OF ASSESSMENT In this course, students are evaluated by the following means of assessment: In-class participation (10%) Participation in class discussion, group discussion,...
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.....................................................................................5 Volatility timing .................................................................................................................................6 Conclusion .........................................................................................................................................7 Appendix ...........................................................................................................................................8 Reference ..........................................................................................................................................9 1 Executive Summary This report provides an analysis on the cases of the successes and weaknesses of Berkshire Hathaway (Berkshire) including models that could be applied to avoid poor performing acquisitions, better diversification of portfolios and use of volatility timing. Success in this report is defined by...
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...Glowa White Paper: Examining Berkshire Hathaway’s 1995 Purchase of GEICO Insurance Tim Glowa Tim@Glowa.ca September 12, 2001 © 2001 Tim Glowa September 12, 2001 -1- Berkshire Hathaway and GEICO Insurance Table of contents © 2001 Tim Glowa Executive Summary.................................................................................................... 3 Introduction................................................................................................................. 4 Review of the case: Berkshire Hathaway purchasing GEICO.................................... 4 Strategic Outcome....................................................................................................... 7 Finance........................................................................................................................ 7 Time Value of Money................................................................................................. 8 Assessment of the GEICO purchase ........................................................................... 8 Time value of money ................................................................................................ 11 An examination of the GEICO acquisition in hindsight........................................... 13 Limitations of Discounted Cash Flow ...................................................................... 15 Limitations of this Analysis ........................................................
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...BERKSHIRE HATHAWAY PURCHASES GEICO WARREN BUFFET Executive Summary Berkshire Hathaway has made a bid for the remaining portion of GEICO stock. This report reviews the offer initiated by Warren Buffett. The details of this report include: • Valuation of GEICO stock. The $70 offer made by Warren Buffett and Berkshire Hathaway includes a 26% premium over the current GEICO stock price of $55.75. This report attempts to determine a range of appropriate stock prices for GEICO. Using the Gordon dividend discount model, along with historical dividend information and projections by Value Line, we estimate the value of GEICO stock in the range of $58 to $80. A review of historical growth rates in GEICO dividends also lends credibility to the investment’s future potential. • Review of Warren Buffett’s investment record. While our analysis lends credence to the bid price of $70 per share for GEICO, we also examine the historical record of Warren Buffett. Buffett’s investment success may add to shareholder’s comfort, as his track record is remarkable when compared to broader market results. • Buffett’s investment philosophy. A letter to shareholders gives us a unique look at Buffett’s considerations for investing. By reviewing his checklist, we attempt to gain insight as to why such a premium is included in the GEICO offer. • Other issues. Buffett’s position on GEICO’s board of directors may shed light on the amount of information Buffett had about the future prospects of GEICO. At first...
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...BERKSHIRE HATHAWAY PURCHASES GEICO WARREN BUFFET Executive Summary Berkshire Hathaway has made a bid for the remaining portion of GEICO stock. This report reviews the offer initiated by Warren Buffett. The details of this report include: . Valuation of GEICO stock. The $70 offer made by Warren Buffett and Berkshire Hathaway includes a 26% premium over the current GEICO stock price of $55.75. This report attempts to determine a range of appropriate stock prices for GEICO. Using the Gordon dividend discount model, along with historical dividend information and projections by Value Line, we estimate the value of GEICO stock in the range of $58 to $80. A review of historical growth rates in GEICO dividends also lends credibility to the investmentfs future potential. . Review of Warren Buffettfs investment record. While our analysis lends credence to the bid price of $70 per share for GEICO, we also examine the historical record of Warren Buffett. Buffettfs investment success may add to shareholderfs comfort, as his track record is remarkable when compared to broader market results. . Buffettfs investment philosophy. A letter to shareholders gives us a unique look at Buffettfs considerations for investing. By reviewing his checklist, we attempt to gain insight as to why such a premium is included in the GEICO offer. . Other issues. Buffettfs position on GEICOfs board of directors may shed light on the amount of information Buffett had about the future prospects...
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...Case Study 2: Warren E. Buffett, 1995 This case was prepared by Professor Robert F. Bruner as the basis for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation. On August 25, 1995, Warren Buffett, the CEO of Berkshire Hathaway, announced that his firm would acquire the 49.6 percent of GEICO Corporation that it did not already own. The $2.3 billion deal would give GEICO shareholders $70.00 per share, up from the $55.75 per share market price before the announcement. Observers were astonished at the 26 percent premium that Berkshire Hathaway would pay, particularly since Buffett proposed to change nothing about GEICO, and there were no apparent synergies in the combination of the two firms. At the announcement, Berkshire Hathaway’s shares closed up 2.4 percent for the day, for a gain in market value of $718 million.1 That day, the Standard & Poor’s 500 index closed up 0.5 percent. The acquisition of GEICO renewed public interest in its architect, Warren Buffett. In many ways he was an anomaly. One of the richest individuals in the world (with an estimated net worth of about $7 billion), he was also respected and even beloved. Though he had accumulated perhaps the best investment record in history (a compound annual increase in wealth of 28 percent from 1965 to 1994),2 Berkshire Hathaway paid him only $100,000 per year to serve as its CEO. Buffett and other insiders controlled 47.9 percent of the company, yet Buffett...
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...“Charismatic CEOs and Succession Planning: Not so Charismatic” This article takes a look at CEO succession planning. It essentially focuses on charismatic CEOs and how they chose their successor. This article argues that the approach most charismatic CEOs take is flawed, hence, their successors tend to struggle. Most charismatic CEOs often do not make succession planning a priority until it is too late. In cases where a company puts a process in place, charismatic CEOs tend to be domineering in their choice of a successor. In other cases, charismatic CEOs die on the job, thereby making the transition shaky. Although this article delves into the open literature for insights, it also uses a case study to drive home the point that charismatic CEOs’ approach to succession planning is flawed. The challenges of succession planning are truer today than ever. Indeed, the abrupt departures of two important charismatic CEOs – Charles Prince of Citygroup and Stanley O’Neal of Merrill Lynch – in the aftermath of the 2008 financial crisis, which fetched these firms colossal losses have made scholars to beam their searchlight on this neglected aspect of corporate governance. The nonchalance with the way some CEOs handle the process of succession planning not only puts their companies in jeopardy, but also signposts a major criterion on which outgoing CEOs and their executive board members will be evaluated. Before we proceed, we will issue a caveat: the practice of succession planning...
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...Corporate Payout Policy Select three publicly listed companies. Analyse their recent dividend decisions and use these to support your critical assessment of the main theories of corporate payout policies. Dividend policy is one of the most important decisions that a manager of a firm makes in order to achieve the goal of the firm, maximising shareholder wealth. Determining a company's corporate payout policy is a question of "how much, when, and how", that is, the value of the payouts, when to deliver the surplus cash to investors, and in what form should the payouts be delivered. Corporate payout policy is also one of the most polarising topics in finance. Theorists such as DeAngelo and DeAngelo (2006a, 2006b, 2008), and Fama and French advance a theory on the financial life-‐cycle of the firm determining dividend policy. Other academics are less sanguine about how dividends affect the value...
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...Market Efficiency and the Johannesburg Securities Exchange Table of Contents 1. Abstract 3 2. Introduction 4 3. The Johannesburg Securities Exchange 4 3.1. History 4 3.2. Function 5 4. The Efficient Market Hypothesis 5 4.1. Strong From 6 4.2. Semi-strong form 6 4.3. Weak form 7 4.4. Random Walk Hypothesis 8 5. Empirical evidence 9 5.1. Joint Hypothesis Problem 10 5.2. Capital Asset Pricing Model 11 5.3. Empirical evidence on investor overreaction 12 6. Comparisons to international stock markets 13 7. Conclusion 15 9. Bibliography 16 1. Abstract The JSE is a securities exchange based in South Africa and is considered to be the largest on the African continent. More than 400 stocks are traded on the JSE and as a result, it is important that investors are aware of the relevant information regarding stocks, which would enable investors to make sound investments. The Efficient Market Hypothesis is used to ascertain whether certain stocks and their respective prices in a particular market reflect all necessary information, which would illustrate an efficient market (Fama, 1970). Carrado and Jordan (2000) supports the aforementioned statement by affirming that markets are efficient in terms of sources of specific information, on condition that information is not exploited to earn above average returns. Furthermore, Fama (1965) explained the efficiency of markets and their stock prices by analyzing the three forms of...
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...FIN 4414 Financial Management Course Syllabus Spring 2010 Term INSTRUCTOR: Dr. T. Craig Tapley Graham-Buffett Master Lecturer of Finance Section: Section: Room: 2109 – Monday and Wednesday, Periods 3-4 (9:35 a.m. – 11:30 a.m.) 7111 – Monday and Wednesday, Periods 5-6 (11:45 a.m. – 1:40 p.m.) 112 Matherly Hall Office Hours: Wednesday (2:00 p.m. - 3:00 p.m.) Thursday (1:00 p.m. - 2:30 p.m.) CONTACT INFORMATION: Office: Phone: Fax: E-Mail: 329 David Stuzin Hall (352) 392-6654 (352) 392-5237 ctapley@ufl.edu http://vista.courses.ufl.edu/ Class Webpage: COURSE MATERIALS: TEXTBOOK 1. Financial Management: Theory and Practice (12th Edition), Eugene F. Brigham and Michael C. Ehrhardt, Thompson/South-Western, 2008, ISBN: 0-324-42269-5. The official textbook for the class will be an excellent reference book as you start your career, as you may easily find that there will be times, on the job, when you need to reference prior material, or formulas, covered in your corporate finance classes at UF. However, books have become somewhat expensive, so you may, instead, purchase the 11th or 10th Edition of the book, typically at a cheaper price, through various online booksellers. However, there are minor differences between the 10th, 11th, and 12th editions; mainly in the order of the chapter. These differences should not impact your ability to perform well in this class, but you may need to map the chapters in the 10th or 11th Edition to those assigned in the 12th Edition. This is...
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...* * How and why is it important for businesses to engage with the media during a crisis? What strategies are successful in external communications for business during such times? Compare & contrast two news stories which centre on a crisis for different businesses giving detailed analysis of each communications strategy. This Essay will begin by reviewing crisis definitions and message strategies. Next it will explore translation strategies used by organisations involved in a crisis to communicate with stakeholders. The essay will then consider Ford–Firestone’s tire failure crisis of 2000 as an example of poor crisis management, and contrast toy maker Mattel’s recall crisis of 2007 as an example of successful crisis management. It will first lie out the rhetorical context of each case before embarking on a detailed analysis equating the effectiveness of both firms’ external communications, and in the case of Ford-Firestone, how these might have been alternatively approached in order to avoid detrimental reputational damage. * Fink (1986, from King, 2000) defines an organisational crisis as ‘a situation that can potentially escalate in intensity, fall under close government or media scrutiny, jeopardize the current public image of the organisation or interfere with normal business operations.’ Pearson and Mitroff support this in their ‘five dimensions of a crisis’, explaining that the situation will be ‘highly visible, require immediate attention, have a surprise...
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