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Warren Buffet - Study Case (Word+Excel)

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Submitted By tissime
Words 580
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Case 2: Warren E. Buffett.
Berkshire Hathaway

Question 1:
The possible meaning of the change in the stock price of Berkshire Hathaway on the day of the announcement is that the shares of GEICO were undervalued at a price of $55,75 and Berkshire Hathaway paid a $14,25 premium per share. However, even though Berkshire Hathaway paid $70 per share, that price was lower than the fair value of GEICO but the shareholders couldn’t turn the offer down. Consequently, Berkshire Hathaway increased it’s market value by $718 millions because the intrinsic value of GEICO was higher than the price it was sold for.

The company had outstanding 1,177,750 shares and on august 25 BH share price changed by positive $609.60. At the end of the session, the price was $25,400.
1,117,750 * 609.60 = 717,956,400 gain.
In addition, BH already owned 50.4% of GEICO. GEICO had on april 30 1995 a total of 67,889,574 shares outstanding. BH is buying 49.6% of the total outstanding shares:
67,889,574 * 49.6% = 33,673,229 shares
Before the acquisition, BH had a value of
Total shares * opening price
1,177,750*24,790.40= $29,196.89 million
And GEICO had a value of
33,673,229*55.75=$1,877.28 million
Resulting to the BH+GEICO = 29,196.89+1,877.28 = $31,074.17 million
After the acquisition, BH had a value of
Total shares*closing price
1,177,750*25,400= $29,914.85 million
And GEICO had a value of
33,673,229*70=$2357.13
Resulting to the total BH+GEICO = 29,914.85+2357.13 = $32,271.98 million and the difference is 32,271.98-31,074.17 = $1,197.81
The difference is coming from the GEICO shares
Difference/total GEICO shares
1,197.81 million / 33,673,229=$35.57 mispricing per share and GEICO shareholders only got $14.25 of this value. The $21.32 went to BH shareholders.

Question 4:
Buffet’s investment philosophy disagrees with modern financial theory because in his CEO letter to

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