Premium Essay

Warren Buffet

In: Business and Management

Submitted By akona
Words 902
Pages 4
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 by the analyst. If we increase the risk premium on the cost of equity we will see negative NPV for both the high and low end range; finding the investment unsuitable.
Buffett calculated the intrinsic value using the risk free rate of 6.86%. Looking at “1995 excel spreadsheet”; using the risk free rate of 6.86%, both the high and low end ranges the investment yields a positive Net present...

Similar Documents

Premium Essay

Warren Buffet

...Warren Buffet Warren Buffet was born on August 30, 1930. He is one of the most financially and personally successful businessmen of our time. He is the Chief Executive Officer of Berkshire Hathaway, a multinational conglomerate holding company, which is based with it;s headquarters in Omaha, Nebraska; Buffett's hometown. His net worth is around $60 billion, and increases with every passing minute. I chose to write about Warren Buffett because he is a person I have always been quite interested in. He is such an incredibly smart and savvy businessman, but he is also a philanthropist. Buffet (2006) announced that he planned to donate more than 80 percent of his wealth to a handful of private charitable foundations. He has gone against what many of the stock "experts" say about investing in fashionable trends. He has made a habit in his career to purchase undervalued stocks until they turn a profit. During his career, he has made several decisions regarding trades and stock choices, which have been highly doubted by analysts and other people in the business, but he chooses to stick to his plans, and comes up in top in the end. An obstacle that he had to face during his journey to success was the decline of the U.S. textile industry. When this happened, he chose to purchase insurance companies, and using its cash flow to become the owner of several other businesses. He even chose to purchase stocks in Coca-Cola when that particular stock was not favorable in......

Words: 702 - Pages: 3

Premium Essay

Warren Buffet

...Warren Buffet Warren Buffet was born on August 30, 1930. He is one of the most financially and personally successful businessmen of our time. He is the Chief Executive Officer of Berkshire Hathaway, a multinational conglomerate holding company, which is based with it;s headquarters in Omaha, Nebraska; Buffett's hometown. His net worth is around $60 billion, and increases with every passing minute. I chose to write about Warren Buffett because he is a person I have always been quite interested in. He is such an incredibly smart and savvy businessman, but he is also a philanthropist. Buffet (2006) announced that he planned to donate more than 80 percent of his wealth to a handful of private charitable foundations. He has gone against what many of the stock "experts" say about investing in fashionable trends. He has made a habit in his career to purchase undervalued stocks until they turn a profit. During his career, he has made several decisions regarding trades and stock choices, which have been highly doubted by analysts and other people in the business, but he chooses to stick to his plans, and comes up in top in the end. An obstacle that he had to face during his journey to success was the decline of the U.S. textile industry. When this happened, he chose to purchase insurance companies, and using its cash flow to become the owner of several other businesses. He even chose to purchase stocks in Coca-Cola when that particular stock was not favorable in......

Words: 705 - Pages: 3

Premium Essay

Warren Buffet

...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...

Words: 1725 - Pages: 7

Premium Essay

Warren Buffet

...1. Be prepared to discuss each aspect of Warren Buffet's investment philosophy.  Do you agree or disagree? A basis in financial theory is preferred but not required tomorrow. Berkshire should continue its strategy based on Buffett's investment philosophy of purchasing undervalued assets. Over the past 40 years, Berkshire has increased shareholder value by an average of 21%, twice the average of the S&P 500 over the same period. Berkshire has a time tested set of rules for the best types of companies to acquire, namely to purchase businesses for less than they are worth. Berkshire must continue this strategy in order to increase shareholder wealth.  Specifically, Buffett must use his investment philosophy that has made him so successful. He should continue to seek companies to invest or purchase that he understands and can purchase at a discount.  The economic slowdown is an opportunity for Berkshire to find undervalued assets. Within the U.S. Buffett could look at the financial industry. He could also look at purchasing assets in a few years when the housing industry recovers. Given Buffett's investment philosophy, this would be an ideal time to purchase undervalued assets and hold them for a long time.  Buffett should also be looking outside of the U.S. for investment opportunities. Brazil, India, Europe, and China are all opportunities. China's stock market is down significantly this year. This may be an excellent time for Buffett to search for bargains.......

Words: 1031 - Pages: 5

Premium Essay

Warren Buffet

...In 1930, Buffett was conceived in Nebraska he was a child of a stockbroker and Congressman. He has ended up presumably the planet's best guru. As a kid, regardless of his family foundation, he conveyed daily papers to profit and this most likely started his premium in the media where he has made a few fruitful speculations incorporating. According to the Washington Post Company, it was the stock which has made him like a cash ton. Furthermore, he did not offers such promises. Permeated with a determination make great and an entrepreneurial nature; however in 1950 his predetermination was contracted promptly in the piece when, in the wake of moving on through Nebraska university; he gave the preference to the Columbia Graduate Business School under the incredible Benjamin Graham. This endeavor grew into a multimillion dollar product globally. He was not having the knowledge related to the trademarks and patents and the importance of the logos and trademark in the large business companies. Due to lack of knowledge he was totally out of the business and his entire business undergo. The business venture has shown the promising indications related to the spirit of entrepreneurship as well as business acumen. Upon being wiped out from his previous business venture he in an individual capacity started to invest actively in the stock market and real estate, respectively until becoming virtually bankrupt. It was an understood fact that this magnitude of debt could not be repaid......

Words: 1187 - Pages: 5

Premium Essay

Warren Buffet

...Warren Buffett may be the most-popular man in Washington at the moment. The Oracle of Omaha charmed the 400 attendees at Fortune's Most Powerful Women Summit by playing his ukulele Tuesday night, earning a standing ovation from the likes of Facebook's Sheryl Sandberg and IBM's Ginni Rometty. During his one-on-one interview Wednesday with Fortune's Carol Loomis, he continued to win over the audience with his refreshing and positive outlook about his life, the economy and women in business. Still, he wasn't afraid to take on the dysfunction in Washington and said it was "so stupid" to even think that the U.S. could default on its debt. Highlights from Buffett's time on stage: On the fight over the debt limit: * "We have spent 237 years since 1776 building a reputation as the most wonderful country on earth, and one that's entrusted with having the reserve currency of the world. ... That is being put in jeopardy now and it could be destroyed in a little while. A great reputation is like virginity. It can preserved, but it can't be restored." * "The whole idea of a debt limit is a terrible, terrible mistake. If you're going to spend more than you take in, what are you going to do except raise the debt limit? So it becomes this political weapon of mass destruction. It really is like a nuclear bomb. It's something that maybe you talk about but never dream of using." On the economy: * "The country’s coming back. You can’t stop the United States. We get through......

Words: 505 - Pages: 3

Premium Essay

Warren Buffet Biography

...WARREN BUFFET The Omaha Miracle 12/ 16/ 2008 Business English 1 WARREN BUFFETT The Omaha Miracle Table of Content I III IV IV Biography / Historical Timeline Berkshire Hathaway Buffet’s Principals Sources 12/ 16/ 2008 Business English 2 WARREN BUFFETT The Omaha Miracle Warren Buffett was the richest man in the world 2008. 12/ 16/ 2008 Business English 3 WARREN BUFFETT The Omaha Miracle He’s a self-made man with a fortune of around $62 billion. 12/ 16/ 2008 Business English 4 WARREN BUFFETT The Omaha Miracle Croatia’s GDP was actually $63 billion in 2008. 12/ 16/ 2008 Business English 5 WARREN BUFFETT The Omaha Miracle He lives in the same house in Omaha, Nebraska that he bought in 1958. 12/ 16/ 2008 Business English 6 WARREN BUFFETT The Omaha Miracle But Mr. Buffett doesn’t live here… 12/ 16/ 2008 Business English 7 WARREN BUFFETT The Omaha Miracle …he actually lives here. 12/ 16/ 2008 Business English 8 WARREN BUFFETT The Omaha Miracle Is this his car? 12/ 16/ 2008 Business English 9 WARREN BUFFETT The Omaha Miracle Well this is. 12/ 16/ 2008 Business English 10 WARREN BUFFETT The Omaha Miracle Like every American he’s also pretty much into sports and even sponsors an international tournament. 12/ 16/ 2008 Business English 11 WARREN BUFFETT The Omaha Miracle The Warren Buffett Bridge Cup to be exact. 12/ 16/ 2008 Business English 12 WARREN BUFFETT The Omaha......

Words: 755 - Pages: 4

Premium Essay

Warren Buffet Case

...“Hortense GREGOIR Monday, November 17th 103300014 Warren E. Buffett, 2005 1. 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? The changes of the stock price for Berkshire Hathaway and Scottish Power plc is due to the fact that the deal between these two companies created value, indeed it created value for the buyers and the sellers because for example thanks to this acquisition Berkshire is more diversified. Moreover, we can also say that the stock prices of Berkshire Hathaway and Scottish Power plc changed due to the variety of products produced by these two companies, for example Berkshire Hathaway has eight types of different products, from insurance to wholesale distributing. The fact that this deal creates value for both buyer and seller prove that the overall market approves it. The $2.17 billion gain in Berkshire’s market value of equity implied that the intrinsic value of PacifiCorp was good. Indeed according to these calculations we can say that its value and its competitors ones are in the same range (see exhibit 9). $2.17 billion312,18 million =6.95 This is what Berkshire is willing to pay for each share of PacifiCorp. 5.1 bilion312.18 million=16.30 ......

Words: 1084 - Pages: 5

Premium Essay

Warren Buffet Profile

...Warren Buffet When people think of one of the brightest minds of the investing world, there is one person that is on every persons mind. That person is the ‘Oracle Of Omaha’ or Warren Buffett. He is a man with dignity and respect that made him a self-made billionaire with working hard. One of his greatest quotes by Warren is “Price is what you pay. Value is what you get.” What Warren means by this is that you are going to have to pay a price for everything, but what you do with it is what you are going to get out of it. Going through his early days to where he is know he has gone through quite a journey that now puts Warren worth $66.7 billion (toolsforforex.com, 2013). People don’t just look up to Warren because he is one of the richest people in the World; he also has one of the kindest hearts with what he does with a lot of his riches. Warren has done many things in his life for people to be inspired by him starting with he has always worked for what he has in his life. In 2008 Warren was declared the richest person in the world. People don’t just looked up to him because of his money he has made alone. In 2006 Warren announced that he would donate 85% of Berkshire Hathaway’s holdings when he dies. He has also won the Presidential Medal of Freedom in 2011 from Barack Obama for helping some companies out during the financial crisis (The Famous People). Besides his career and philanthropy he is involved in, he also has a family. Warren was married to Susie......

Words: 1498 - Pages: 6

Premium Essay

Warren Buffet Case

...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......

Words: 474 - Pages: 2

Premium Essay

Case Study: Warren Buffet

...Matt Olbrantz ENGM 5550 2/08/2011 Interim Assignment #2-Case Study; Warren Buffett It was apparent at a young age that Buffett was destined for success. His parents, grandparents knew he was a gifted as a child and eventually would turn into something great. He had something that no one else had, a savvy for business ethics and profit. It is incredible to me that by the time Buffett finished high school he had $6,000 in savings. And even more incredible to have almost $10,000 by the time he got out of college. Buffett took what he learned as a young boy about selling everyday items like gum and used the same philosophy in making billions in the stock market. As a young boy shades of brilliance were apparent, selling lemonade, bubble gum, then the purchase of pin ball machines for use in barber shops and then selling them for a profit. Buffett began trading stocks at a young age with success. It was obvious Buffett knew what he was doing as an adolescent and I think this set the foundation’s for his strategies later in life. It also shows that he would not invest something he was not familiar with. Who is not familiar with gum, lemonade and pin ball as a kid?? Warren Buffett was first exposed to formal training in investing at Columbia University, where Buffett studied under Prof. Ben Graham. Graham developed a method that identified undervalued stocks and this was Buffett’s cornerstone approach of what is now called “valued investing”...

Words: 1277 - Pages: 6

Premium Essay

Warren Buffet, 1995 Case Analysis

...Warren Buffet I. Point of View Warren Buffet – CEO of Berkshire Hathaway II. Statement of the Problem Warren Buffet’s decision to acquire GEICO at a 26% premium compared to the market price. III. Objectives a. To be able to understand the issue of the case. b. To be able to come up with a recommendation to help the company’s decision. IV. Areas of Consideration * Buffett’s investment philosophy. Buffett’s considerations for investment give a unique outlook. By reviewing his checklist, we attempt to gain insight as to why such a premium is included in the GEICO offer. * 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. * GEICO Corporation’s performance. * Geico had paid an increasing dividend each year. * Geico was the seventh largest auto insurer in the United States. * The firm was the lowest-cost insurance provider in the industry. * Geico’s share price had been hammered by double-digit inflation, higher accident rates, and high damage awards. V. Alternative Courses of Action 1. Accept: The acquisition of GEICO at a premium. Advantages: * It would encourage a positive public interest * It would create an increase in company’s......

Words: 413 - Pages: 2

Premium Essay

Warren Buffet Case - Bekshire Hathaway

...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)...

Words: 549 - Pages: 3

Premium Essay

Warren Buffet Case Abstract

...CASE#1 Abstract: Warren E. Buffett, 2005 On May 24, 2005, the MidAmerican Energy Holdings Company (a subsidiary of Berkshire Hathaway) would acquire the electric utility PacifiCorp. M would purchase P with $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. MidAmerican is a leader in the production of energy from diversified sources; it is also the owner of the second-largest full-service independent real estate brokerage in the US. Until March 2002, Berkshire has acquired a 9.9% voting interest and an 83.7% economic interest in the equity of MidAmerican. By 2004, Berkshire has always announced and emphasized that it is the time to take some action (acquisition) and to find the “elephant” to make one significant gain. The acquisition of PacifiCorp thus was a good investment target. First of all, PacifiCorp is a leading, low-cost energy producer and distributor which served 1.6million customers in six states in the western US. It has a strategic fit with MidAmerican. Now the main issues are to measure the bid price and future benefits to see that whether this acquisition can fit the criteria of Berkshire – long-term goal of a 15% annual growth rate in intrinsic value. PS: Long-term economic goal is to maximize Berkshire's average annual rate of gain in intrinsic busn value on a per-share basis. We do not measure the economic significance or performance by its size; but by per-share progress. The rate of per-share progress will diminish in the future -......

Words: 553 - Pages: 3

Free Essay

Warren Buffet

...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fs future potential. . Review of Warren Buffettfs 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fs investment success may add to shareholderfs comfort, as his track record is remarkable when compared to broader market results. . Buffettfs investment philosophy. A letter to shareholders gives us a unique look at Buffettfs 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fs position on GEICOfs board of directors may shed light on the amount of information Buffett had about the future......

Words: 3151 - Pages: 13