•Show calculations that support your findings, including those involving rates of return. •Defend which valuation model best supports your findings.
Capital Valuation Paper
Capital Valuation Paper
Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States, that oversees and manages a number of subsidiary companies. Berkshire Hathaway Inc. has a goal to increase its ownership of first-class businesses. Berkshire Hathaway Inc. must determine if the project is worthwhile. One way an organization can determine its worth of a project is by using the valuation process. This process links risk and return to help estimate the worth (Gitman, 2009). According to Investopedia,” market value is often different from book value because the market takes into account future growth potential.” This paper will show 6 different valuation models showing the market price of Berkshire Hathaway Inc.’s debt, if any, and equity. Along with the models this paper will show calculations to support these findings, including those involving rates of return. Finally, Team D will defend which valuation model best supports their findings. FCF Valuation
Berkshire Hathaway’s free cash flow according to Gitman, 2009 “ represents the amount of cash flow available to meet the operating needs and investments in fixed and net current assets.” Free cash flow (FCF) can be defined as follows: FCF = OCF-Net fixed asset investment (NFAI) – Net current asset investment (NCAI). OCF = [EBIT X (1-T)]+Depreciation
Berkshire Hathaway’s OCF = [$15,314,000 x (1 – 0.30)] + $4,683,000
= [$15,314,000 x 0.70] + $4,683,000
= $10,719,800 + $4,683,000 = $15,402,800
NAFI is calculated as follows:
NAFI = Change in Net Fixed Assets + Depreciation
Berkshire Hathaway’s NAFI = $100,391,000 – 93,126,000 + 4,683,000 = $11,948,000 NCAI is calculated as follows:
NCAI = Change in current assets – change in (accounts payable + accruals) Berkshire Hathaway’s NCAI = -2,260,000 – 32,706,000 = -$34,966,000 Berkshire Hathaway’s FCF = $15,402,800 (OCF) - $11,948,000 (NAFI) – (-$34,966,000) (NCAI) = $38,430,800 The Free Cash Flow valuation model is an intense combination of various calculations. To best explain Berkshire Hathaway’s free cash flow valuation, according to Gitman 2009, the valuation is completed in steps. Step1Calculate the present value of the free cash flow occurring from the end of 2012 to infinity, measured at the end of 2011, this is because a constant rate of growth in FCF is forecast beyond 2012.
Step 2 Add the present value of the FCF from 2012 to infinity, to the 2011 FCF value to get the total FCF in 2011.
Step 3 Find the sum of the present values of the FCF’s for 2007 through 2011 to determine the value of the entire company. | FCF| | |
2007| 7,180,000,000| 0.926| 6,648,680,000|
2008| 5,110,000,000| 0.857| 4,379,270,000|
2009| 1,091,000,000| 0.794| 866,254,000|
2010| 11,920,000,000| 0.735| 8,761,200,000|
2011| 830,105,280| 0.681| 565,301,696|
| Value of entire Company| 21,220,705,696|
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Copyright 2012 FactSet Research Systems Inc. All rights reserved. Source FactSet Fundamentals.|
Step 4 Calculate the value of the common stock.
The value of Berkshire Hathaway’s common stock is estimated to be $21,159,383,452. To find the price per share divide the common stock value by the outstanding shares of 1,068,843,376. This is equal to $19.80 per share. Discounted Cash Flow Analysis
For purposes of providing for the justification of a firm’s...