Warren Buffett 2005

Corporate Finance

27 Aug. 2014

Warren Buffett, 2005 Case Study

Question 4

-How well has Berkshire Hathaway performed?

Berkshire Hathaway has outperformed the market (S&P 500) since 1965, and the company has increased its wealth by 24% since 1965. Also, its closing price was $107 in 1977, then in May 2004, $85,500. So, Berkshire Hathaway has performed very well.

-How well has it performed in the aggregate?

From Exhibit 1, Scottish Power had outperformed the market from March to May 2005. On the other side, Berkshire Hathaway has been below the market average for April and May 2005. Thus, it is reasonable that Berkshire Hathaway was attracted to purchase Pacificorp.

-What about its investment in MidAmerican Energy Holdings?

The way they did it was very effective. Because by owning 9.9% of voting interest and 83.7% of economic interest of MidAmerican’s equity, which allows them to have a major stake in the company. However, MidAmerican had net earnings of $170m, compared to $416m in 2003, resulting in net loss for 2003-2004. Thus, acquiring Pacificorp would make sense as it will generate profitable income to raise their net income in 2005.

Question 5

Berkshire Hathaway has invested $3.8 billion, which had a market value of $24.7 billion. It means their gain was over 5 times greater than the investment. Thus, it was a wise investment decision.

Question 6

-From Warren Buffett’s perspective, what is the intrinsic value?

The present value of future expected performance.

-Why is it accorded such importance?

It is the only logical way to evaluate the attractiveness of a firm when making investment decisions.

-How is it estimated?

Any excess value added by a firm after the charge for use of capital in that firm.

-What are the alternatives to intrinsic value?

Performance of Berkshire by its size, accounting profit, consolidated reported earnings.

-Why does Buffett reject them?

Because Buffett believed that investment decisions...