Warren Buffett

(a) From Warren Buffett’s perspective, what is the intrinsic value?

The case of Buffett mentions the intrinsic value is that “the present value of future expected performance “(Bruner 2010). Intrinsic value is all significant and is a logical way to evaluate the investments of business. Also, the value is based on the future cash flow and interest rates.

Why is it accorded such importance?

“All the methods fall short in determining whether” (Bruner 2010). Actually, an investor will evaluate the values to decide whether it is worth to buy something.

How is it estimated?

From the case, we can see discount rates used in deciding intrinsic value should be relate to the risk of cash flows. The conventional model for establishing discount rate was the capital asset pricing model (CAPM), which is a risk premium in the long-run. For example, the U.S. Treasury bonds yield.

What are the alternatives to intrinsic value?

Intrinsic value is related to the book values, like the example ‘investment in education’. Also, accounting profit is another significant part.

Why does Buffett reject them?

Buffett focus on the ability to earn returns in excess of the cost of capital. But the alternatives do not include future forecasts of earnings and the economic reality. It is hard to know whether future rates of returns excess the required rate of return or not. Accounting reality is important, which is conservative, backward-looking, and governed by generally accepted accounting principles (GAAP). Also it should be based on the economic reality (Bruner 2010).GAPP is established of net profit, in economic reality and cash flows.