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Warren Buffet Case

In: Business and Management

Submitted By tmscott
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Taylor Scott
1/28/13

Warren Buffett Case Analysis

By analyzing the financial statements and Warren Buffett’s unique investment philosophy, the problem that must be answered is whether the acquisition of PacifiCorp increased Berkshire Hathaway’s intrinsic value. Buffett has a very unique way of measuring intrinsic value that would make it slightly more difficult to determine if this acquisition did, in fact, make Berkshire Hathaway more profitable. According to Warren Buffett, intrinsic value is “per-share progress”. Buffett assessed intrinsic value as the present value of future expected performance.
For historical reference, Berkshire Hathaway has been outperforming the market since its inception in 1965. In 1977, the firm’s year-end closing share price was at $107. Fast-forward to May 24, 2005 and the closing price on BH’s 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 other large stocks. It started out with a decline due to factors such as inflation, technological change, and competition from foreign competitors, but has come back strongly since it closed the textile side of its business operations. Most of this success can be attributed to Warren Buffett and his very unique investment philosophy that can be viewed very differently by many in the same field.
According to the case, on the announcement day of the acquisition, Berkshire Hathaway class A shares closed 2.4% up for the day, while Scottish Power’s share price jumped 6.28% and the S&P 500 Composite Index closed with a 0.02% gain. What do these gains ultimately mean? These positive significant gains on both sides might mean several different things. One possible meaning of these stock price increases could be due to the fact that the deal created value for both buyers and...

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