Buffet Case Study 2005

The Warren E. Buffet 2005

case study

© Ivan Bonchev, 2015

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Goals of the case study:

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setting themes:

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risk-and-return

economic (not accounting) reality)

the time value of money

the benefits of alignment of agents and owners

linking valuation to the behavior of investors in the capital

market

modeling good practice in management and investment

characterizing stock prices as equaling the present value of

future equity cash flows

exercising simple equity-valuation skills

© Ivan Bonchev, 2015

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Questions 1-3

1.

2.

3.

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 $2.55

billion gain in Berkshire’s market value of equity

imply about the intrinsic value of PacifiCorp?

Based on the multiples for comparable regulated

utilities, what is the range of possible values for

PacifiCorp? What questions might you have about

this range?

Assess the bid for PacifiCorp. How does it compare

with the firm’s intrinsic value?

© Ivan Bonchev, 2015

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Questions 4-6

4.

5.

6.

How well has Berkshire Hathaway performed? How

well has it performed in the aggregate? What about

its investment in MidAmerican Energy Holdings?

What is your assessment of Berkshire’s investments

in Buffett’s Big Four: American Express, Coca-Cola,

Gillette, and Wells Fargo?

From Warren Buffett’s perspective, what is the

intrinsic value? Why is it accorded such importance?

How is it estimated? What are the alternatives to

intrinsic value? Why does Buffett reject them?

© Ivan Bonchev, 2015

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Questions 7-8

7.

Critically assess Buffett’s investment philosophy. Be

prepared to identify points where you agree and

disagree with him.

8.

Should Berkshire Hathaway’s shareholders endorse

the acquisition of PacifiCorp?