Warren Buffet

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 $2.55 billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp?

Answer: -

The possible meaning of the change of the stock is that the facts that are created in the deal had a positive effect on both the buyers ( BRK) and the sellers which are the mother company of Pacific( Scottish power),

To find the 2.55 Billion gain of BRK on the market value equity that the intrinsic value of Pacific was good because it was within the range demonstrated in the calculations I have done:-

$2.55 billion / 312.8 million = $8.17 (Berkshire is willing to pay this premium for each share of PacifiCorp)

5.1 billion / 312.18 million = $16.30 per share of PacifiCorp

$8.17 + 16.30 = $24.47

(all information taken from chart 9)

2. 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?

Answer:- We find the range of possible values for PacifiCorp in chart 10:-

A. Revenue median of $6.252 Billion, mean of $6.584 Billion.

B. EBIT median of $8.775 Billion, mean of $9.289 Billion.

C- EBITDA median of $9.023 Billion, mean of $9.076 Billion.

D- Net Income median of $7.596 Billion, mean of $7.553 Billion.

E- EPS median of $4.277 Billion, and a mean of $4.308 Billion.

F- Book value median of $5.904 Billion, mean of $5.678 Billion.

The questions we may have on PacifiCorp is about the EBITDA and the NI comparing the value of them.

3. Assess the bid for PacifiCorp. How does it compare with the firm’s intrinsic value? Perform a discounted cash-flow (DCF) analysis of PacifiCorp.

Anwer :-

If you use CAPM for the simple DCF analysis: Return = rf +B (rm-rt)