...Saint Martin’s University Warren Buffett Photo Credit: Mark Seliger for TIME Warren Edward Buffett was born on August 30, 1930 in Omaha Nebraska to Howard and Leila Buffett. His father, Howard, was a stockbroker until elected into congress in 1942; his mother, Leila, was a homemaker. Warren Buffett is the middle child and only boy born to his parents. His sisters, Doris and Roberta, also make headlines with their generosity and successes. Photo Credit: classicphotos.com Photo Credit: classicphotos.com As a young boy Warren Buffett could be described as a math guru, he was able to calculate large tables of numbers in his head; a skill he still shows off today. Warren Buffett would often visit his father’s brokerage shop and write stock prices on the blackboard. Being so close to the industry allowed an 11 year old Warren Buffett to invest in three shares of Cities Service Preferred stock, costing him $38 per share. The shares dropped to $27 but he remained patient and waited for them to rise to $40 before selling for a small profit. Regrettably the stock soon rose to $200 but this didn’t faze young Warren Buffett, as he says “It was an early lesson in patience in investing.” (biography.com). At the age of 13 Warren Buffett ran a successful paperboy business where he filed his taxes and used his bike as a business deduction of $35. In high school Warren Buffett and a friend purchased a use pinball machine for $35 and installed it into a barbershop. The two were...
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...Bradford KilshawFIN 3717Shan He Warren E. Buffett, 2005 On May 24, 2005, CEO of Berkshire Hathaway Inc., Warren Buffet, stated that one of the company's subsidiaries, MidAmerican Energy Holdings Company, acquired the electric utility PacifiCorp. MidAmerican bought PacifiCorp from its parent company, Scottish Power plc, for $5.1 billion cash and $4.3 billion in preferred stock and liabilities. This acquisition was the second largest of Buffet's career and his largest since 1998. Warren Buffet has long been viewed as one of the most savvy investors in the world. With an estimated net worth of $44 billion, he is one of the richest men walking the planet. Public interest in Buffet rose highly again with the large scale purchase of PacifiCorp. While at Columbia University, Warren Buffet studied under Benjamin Graham, noted for developing a method for identifying undervalued stocks. His method focussed on the value of assets like cash, net working capital and physical assets, and ultimately, Buffet modified it to focus on valuable franchises going unrecognized in the market as well. Buffet's investing strategy includes several different philosophies. Some approaches he uses include: economic reality, the cost of lost opportunity, value creation, risk and discount rates, diversification, investing behavior driven by information, analysis, and self-discipline, setting emotion aside, alignment of agents and owners, and measuring performance based on intrinsic value instead of profits...
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...Buffet Ratio Analysis Current Ratio Interpretation: Traditionally, a company with a ratio over 1.0 is considered sound; however, Warren Buffet feels that the current ratio is practically useless in determining whether or not a company has a durable competitive advantage. His theory suggests that companies with strong economies do not need high liquidity. Apple’s Current Ratio for 2012, in billions | Current Assets | $ 57,653 | Current Liabilities | $ 38,542 | Ratio | 1.496 | Earnings Per Share Interpretation: A higher earnings per share generally indicates a higher stock price, which is good for investors; however, according to Warren Buffet, a single year’s numbers cannot determine whether or not a company has a durable competitive advantage. He prefers to review the numbers over a ten year period, and he looks for a consistent upward trend. After reviewing Apple’s earnings per share, it appears that competitive advantage is working in their favor. Apple’s Earnings Per Share, 2003-2012 | Year | 2012 | 2011 | 2010 | 2009 | 2008 | Net Income | $ 41,733,000,000 | $ 25,922,000,000 | $ 14,013,000,000 | 8,235,000,000 | $ 6,119,000,000 | # Shares Outstanding | 929,277,000 | 915,970,000 | 899,805,500 | 888,325,973 | 872,328,975 | Earnings Per Share | $ 44.91 | $ 28.30 | $ 15.57 | $ 9.27 | $ 7.01 | | | | | | | Year | 2007 | 2006 | 2005 | 2004 | 2003...
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...Hathaway dan Scottish Power pada hari pengumuman akuisisi. Harga penawaran untuk PacifiCorp adalah $ 9,4 miliar, dimana Berkshire membayarnya dengan kas sebesar $ 5,1 miliar dan sisanya menggunakan hutang dan saham preferen senilai $ 4,1 miliar. Dampak dari pengumuman tersebut adalah naiknya harga saham kelas A Berkshire Hathaway sebesar 2,4%. Dari sudut pandang Berkshire dan investor lainnya, akuisisi MidAmerican terhadap PacifiCorp dapat memberikan potensi perkembangan yang baik sehingga tak heran berita ini memperoleh respon positif, menyebabkan harga saham Berkshire sebagai holding company MidAmerican mengalami kenaikan harga saham. Berkshire percaya bahwa PacifiCorp dapat memberikan keuntungan produktif di masa depan. Dari sudut pandang Buffet yang menganut prinsip value-investing, nilai intrinsik PacifiCorp tentu lebih tinggi dibanding biaya $ 9,4 miliar yang dikeluarkan. Metode valuasi berdasarkan market multiple untuk perusahaan sebanding, dapat dilihat bahwa rentang Enterprise Value yang mungkin untuk PacifiCorp adalah membentuk antara $ 6,252 miliar sampai $ 9,289 miliar. Sedangkan rentang market value of Equity yang mungkin adalah antara $ 4,277 miliar sampai $ 5,904 miliar. Dalam kasus ini, Berkshire lewat MidAmerican mengakuisisi PacifiCorp dengan harga $ 9,4 miliar. Harga tersebut berada diluar rentang enterprise value maupun market value of equity yang dihitung berdasarkan market multiple. Hal ini tentu akan menimbulkan pertanyaan, mengapa Berkshire bersedia untuk membeli...
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...Warren Buffett and Gillette Background of the Active Investor Warren Buffett is known as one of the world’s most notable investors. He is a self-made investor, now worth billions of dollars. Buffets premise is that people should base their investing on common sense and search out assets that are selling for less than they are worth (Pardoe, 2005). At an early age Buffett had a knack for making money. At six year old, Buffett made a five cent profit by purchasing a six-pack of Coca-Cola for twenty-five cent and reselling each bottle for a nickel. At eleven, he purchased three shares of Cities Service at $38 per share. Shortly after buying the stock, it fell to just over $27 per share (Kennon). When the shares rebounded to $40 he sold the shares, but regretted his actions when the shares shot up to $200. The experience taught him that patience is a virtue (Kennon). Buffett was a graduate of the University of Nebraska-Lincoln. Some time after graduation, Buffett had the opportunity to work for his mentor, Ben Graham, on Wall Street. There, he spent his day analyzing S&P reports, searching for investment opportunities (Kennon). He took a different interest than that of his mentor, he became interested in how a company worked, what made it superior to competitors and observed how the company was managed when deciding to invest; he was not interested in the corporate leadership of the companies he researched and invested in. In the mid-1950’s Buffett aligned himself...
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...Week 2 Case; Warren Buffet, 2005 Introduction This case is about Berkshire Hathaway’s bid, through MidAmerican Energy Holdings Company, to acquire PacifiCorp, which is an energy- utilty based company, in order to diversify the activities of Berkshire Hathaway. The ideas of enterprise valuation are portrayed in two methods. These methods are multiple valuation and discount factor. These methods help evaluate the impact that a single investment can have on the acquiring company. Issues The stock prices for Berkshire Hathaway’s increased 2.4% and Scottish Power plc increased 6.28% after the acquisition of PacifiCorp. This positive market reaction was a good indicator that the deal had been a good move for both parties. The 2.55 billion gain in Berkshire’s market value hints that Berkshire Hathaway paid the acquisition at a discount price per share. Scottish power’s increase represented an increase of GBP27.75 in per-share change. The shares outstanding were over 466 million and the market value that day was 12.93 billion British pound. PacifiCorp is a private owed company, so their cash flow statements are not publicly available. The discount cash flow method would not be good way to measure the company’s value. The valuation multiple method is used because statistics from comparable companies are available. A disadvantage to this method would be if the comparable companies within that industry are mispriced. Another question raised about the range could be that...
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...Case Question 1 In his 2002 letter to shareholders, Warren Buffett referred to financial derivatives as the "financial weapons of mass destruction" and a ticking "time bomb" waiting to explode. His perspective may well be derived from his own experience with some derivative positions his company, Berkshire Hathaway Inc, inherited from the $22 billion purchase of General Reinsurance Corporation in 1998 (Berkshire Hathaway Inc, 2002). Unable to find an agreeable counterparty to buy the General Reinsurance Securities, a subsidiary of General Reinsurance Corporation that deals with derivatives, Buffett decided to close it which required him to unwind the subsidiary's derivative positions. The complexity of the derivatives positions took him years to complete the unwinding and at a pretax loss of $173 million for General Reinsurance Corp in 2002 (Berkshire Hathaway Inc, 2002) and $409 million in cumulative pretax loss as of 2008 (Berkshire Hathaway Inc, 2009). He likens the unwinding process to entering hell, stating that derivatives positions were "easy to enter and almost impossible to get exit" (Berkshire Hathaway Inc, 2004). In 2002, trades in derivatives were growing rapidly in recent years and they pose a "mega-catastrophic risk" that could harm not only their sellers and buyers, but the whole economic system for the following reasons: 1. Mark-to-market accounting (Investopedia 2011) is a legal form of accounting for a venture involved in buying and selling securities...
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...ITESM Dirección Financiera Mariana Soto Giraldo A01324999 ------------------------------------------------- WARREN BUFFET Biography American business magnate, investor and philanthropist. The most successful investor in the world. Chairman, CEO and largest stakeholder of Berkshire Hathaway. He studied at Columbia University. Trained in investing by professor Benjamin Graham, who’s the coauthor of Security Analysis (Method of identifying undervalued stocks, P<Intrinsic Value). Graham | Buffet | Focus on the value of assets such as: cash, net working capital and physical assets. | + Also on valuable franchises that were unrecognized by the market. | Berkshire Hathaway American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. - 1965-1995 Compound Annual Growth Rate: 24% - May 24, 2005 Announcement of the acquisition of Pacific Corp (electric utility) by Mid American Energy Holdings Company (subsidiary). - 2004 Portfolio of businesses included: insurance, apparel, building products, finance and financial products, flight services, retail, grocery distribution and carpet and floor coverings. Buffet investment philosophy: 1) Economic reality not accounting reality Long-term prospects based on the quality of management and the firm’s capacity to create value. 2) The cost of the lost opportunity Analyzing and comparing an investment opportunity with the second alternative (the lost one). 3)...
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...Case 1: Warren Buffet a) Buffett portrays intrinsic value as “The only logical way to evaluate the relative attractiveness of investments and businesses.” (Bruner et al, 2009 p.7) It has accorded such importance because it can be used to estimate the value of the businesses ongoing operations and not the companies stock. Through the calculation of the discounted cash flows, and moreover the net present value of the forecasted performance, we can therefore figure out whether the investment holds the potential to generate value. By comparing these amounts to ones within the market and therefore being able to identify certain businesses that are very undervalued. The alternatives of valuing an investment include calculating the book value or accounting profit. Buffett rejects the alternatives to intrinsic value because he believes that the conventional accounting approach or methods follow certain rules that do not accurately forecast the future of the investments performance. (b) The very essence of Buffett’s investment philosophy is that of his use of intrinsic value to determine the quality and future value of an investment, instead of basing it on accounting reality. However, accounting profit should be used hand in hand with intrinsic value because it helps clarify managements skills and how they put their capital to use. Buffett calculates the discounted cash flows of the particular company, therefore understanding its economic reality. Rather than the financial statements...
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...frequently nonsensical.” ------------------------------------------------- This report will analysis the statement by Warren Buffett, and it considers the contrasting evidence on the validity of the observation on the Efficient Markets Hypothesis. The report briefly outlines the forms of the Efficient Market Hypothesis, the report also analysis’s the evidence both seminal and recent on the theory relating to the three forms of the hypothesis. It also examines the theoretical role and motivation of analysts in creating market efficiency; lastly it looks at alternative perspectives on the pricing of securities. Introduction In 1984 Warren Buffett penned an article titled “The Superinvestors of Graham-and-Doddsville”, based on a speech he had given on the occasion of the 50th anniversary of his mentor Ben Graham’s legendary textbook, Security Analysis. In it, Buffett rejected the then growing (and now entrenched) view in academia that markets are ''efficient'' because ''stock prices reflect everything that is known about a company’s prospects and about the state of the economy.'' Warren Buffett argued against EMH, saying the preponderance of value investors among the world's best money managers rebuts the claim of EMH proponents that luck is the reason some investors appear more successful than others. (Hoffman, 2010) This report will either agree with Buffet or somewhat sit on the fence. A market is said to be efficient with respect to an information set if the price ‘fully...
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...What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement? Specifically, what does the $2.17-billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp? May 24, 2005 marked the day of Warren Buffett’s (CEO of Berkshire Hathaway Inc.) largest acquisition since 1998. On this day it was announced that the electric utility company PacifiCorp was going to be acquired by the Berkshire Hathaway subsidiary, MidAmerican Energy Holdings Company. PacifiCorp was purchased from their “parent” company Scottish Power plc. PacifiCorp was created in 1984. They provide electricity to citizens throughout California, Oregon, Idaho, Utah, Washington, and Wyoming. Warren Buffett was looking to expand Berkshire Hathaway’s interests more deeply in the energy field. After all was said and done, MidAmerican ended up purchasing PacifiCorp from Scottish Power plc for $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. Management at each company felt as though the deal was great for all those involved. Scottish Power’s CEO Ian Russell stated “we strongly believe that this transaction is in the best interests of PacifiCorp’s customers and employees” (18). The deal to acquire PacifiCorp by MidAmerican Energy Holdings Company resulted in a positive stock price increase for both Berkshire Hathaway and Scottish Power plc. Berkshire Hathaway’s Class A shares noticed...
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...employees over the world. Even though AIG is such a giant corporation, it has encountered financial problems in the early 2000s. Under financial pressure and a lack of internal control, AIG have committed frauds resulting in several scandals. One of the accounting scandals was disclosed during 2005 which involved a material mis-statement due to false transactions during 2000. This scandal set to prelude leading the downfall of AIG in 2008. In this paper, I will analyze the cause, the transactions and finally effects of the scandal. The Accounting Scandal The Players The CEO of AIG was Maurice “Hank” Greenberg. Greenberg joined AIG in 1962 and led AIG for thirty eight years until his retirement in March 2005. Greenberg was not only the CEO, but also the chairman of the board of AIG. AIG also have several subsidiaries, which include National Union Fire Insurance Company of Pittsburgh (NUFIC) and Hartford Steam Boiler Inspection (HSB). Their financial information are consolidated in AIG’s financial statements. The scandal also involves another corporation General Re Corporation. General Re is a subsidiary of Berkshire Hathaway, Inc., an investment group run by the billionaire Warren Buffet. General Re also has subsidiaries all over the world and together and it is one of the biggest reinsurance companies in the World. Reinsurance companies are entities that insure the insurance companies. They help insurance companies share risk by selling reinsurance plans that would help...
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...international. We will utilize the case methodology to focus our analysis. Cases describe a context in which a particular problem is found. Regardless of the particular characteristics of the problem, problem solving follows a general methodology: identification of the problem, describing the context of the problem, analysis of potential alternative solutions, the identification of the best solution, implementation of the best solution , and the creation of controls and contingency plans, if applicable. Text and Other Sources: E-book based on Case Studies in Finance, 6th ed., 2010, McGraw Hill, Toronto, ISBN Prerequisites Management 3412, Fundamentals of Investments Investments, Analysis & Management, 2nd Canadian Ed., 2005, Cleary & Jones, John Wiley & Sons Canada Ltd., Mississauga ISBN 0-470-83542-7 Management 3460, Corporate Finance Fundamentals of Corporate Finance, 6th Canadian Ed., 2007, Ross, Westerfield, Jordan, & Roberts, McGraw-Hill Ryerson, Toronto ISBN 13: 978-0-07-095910-1 A list of topics for which you should have working knowledge follows: 1. Time value of money 2. Market Efficiency 3. Valuation, risk, and return 4. Capital budgeting 5. Cost of capital 6. Pro-forma financial statements 7. Capital structure 8. Dividend policy 9. Portfolio theory 10. Foreign exchange This course is designed not only to deepen your knowledge of concepts already covered in other...
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...Value investing is the strategy of purchasing an asset which is trading at a significant discount from its determined intrinsic value. It has long been regarded as a low risk method of providing outstanding investment returns (Klarman 2001). The investment strategy was described by Benjamin Graham and David Dodd in their book, Security Analysis (1940, p. 724). Over subsequent decades the investment approach has evolved utilizing varying fundamental methodologies but always maintaining the principle of investing when a discount to intrinsic value exists. Graham and Dodd (1940, p. 368) referred to this principle as the 'margin of safety'. This essay will explore the various methodologies, expand on the 'margin of safety' concept and discover the factors that have led to the success of the exponents of value investing. Bierig’s (2000) assessment of the Graham and Dodd approach indicated that a value investor doesn’t just follow share market fads but instead ‘searches for stocks selling for less than their intrinsic value’ and after purchasing, waits for market recognition that corrects this discrepancy. Athanassakos (2011b) has illustrated that a search for undervalued stocks is the initial process undertaken. He maintains that these stocks tend to be ‘avoided by large institutional investors’ and are not the ‘glamour stocks everyone wants to own’. Graham (1973, p. 211) describes two methods of searching for fundamentally undervalued stocks; companies selling at a low price to...
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...Shehzad Chowdhury Don Taylor Seminar: Issues in Corp Finance 01/31/2015 Warren Buffet Case This case study talks about Warren Buffets’s Berkshire Hathaway company; initially, it discuses regarding the possible meaning of the alters in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement is for the reason to the truth that the deal formed value for both consumers and suppliers; In addition, Berkshire was extra expanded subsequent to the acquisition. The $2.55 billion gain in Berkshire’s market value of equity oblique that the basic value of PacifiCorp was fine since it cut down within the range of challengers supported on the subsequent result, which is $2.55 billion divided by 312 and 312 again divided by 18 million gives $8.17.Next, Berkshire is keen to give this premium for every share of PacifiCorp 5.1 billion divided by 312.18 million that results $16.30 per share of PacifiCorp $8.17 plus 16.30 equals $24.47. Later, we discover the range of likely values for PacifiCorp in Exhibit 10 as follows: Revenue median of $6.252 Billion, average of $6.584 Billion, EBIT median of $8.775 Billion, average of $9.289 Billion, EBITDA median of $9.023 Billion, average of $9.076 Billion, Net Income median of $7.596 Billion, average of $7.553 Billion, EPS median of $4.277 Billion, and a mean of $4.308 Billion and Book value median of $5.904 Billion, mean of $5.678 Billion. The Question about income; the implied worth of PacifiCorp is giving...
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