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 $2.17-billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp?
The significant change in stock prices for Berkshire Hathaway and Scottish Power plc is partially due to the wide variety of products produced under these names. The approval of these investments and products are indicated by the overall market because they are creating value for both the buyer and the seller. Berkshire Hathaway is responsible for eight different types of product ranging from insurance and financial products to retail including wholesale distributing and apparel along with an array of smaller businesses.
Warren Buffett’s name goes a long way based on the type of work and success he has had in the past. His decision to run the company in the interests of the shareholders has proven to be successful. “In 1977, Berkshire Hathaway’s year-end closing share price was $102; on May 24, 2005 the closing price on Class A shares reached $85,500”.
It seems that Warren Buffett refuses to ‘split’ the firm’s share price in order to make it more accessible to everyday investors is because of the value of the company and the contribution that these investors have made to Berkshire Hathaway. They make risky decisions and expect a successful outcome which in turn results in a profitable project.
The $2.17-billion gain in Berkshire’s market value implies that the intrinsic value of PacifiCorp is increasing as well. The market value may be different than the intrinsic value however the intrinsic value is the actual value of the company including assets and the underlying perception of that value. Both tangible and intangible factors may be included. Therefore the intrinsic value of the PacifiCorp is on the rise with the amount of revenue they are generating.
1. 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?
PacifiCorp |Revenue |EBIT |EBITDA |Net Income |EPS |Book Value | |Median |$6.252B |$8.775B |$9.023B |$7.596B |$4.277B |$5.904B | |Mean |$6.584B |$9.289B |$9.076B |$7.553B |$4.308B |$5.678B | |
For the most part, the means are higher than the medians for the enterprise financial value of PacifiCorp.
2. Assess the bid for PacifiCorp. How does it compare with the firm’s intrinsic value? As an alternative, the instructor could suggest that students perform a simple discounted cash flow (DCF) analysis.
Warren Buffett and Berkshire Hathaway’s bid of $5.1 billion for PacifiCorp was a risky yet profitable move for the pair. With the average revenue earning of $6.584 billion and an average net income of $7.553 billion, the earnings seem to exceed the overall cost of purchasing this corporation. PacifiCorp had steady returns for numerous years as presented below. 5.4 percent of their stock was preferred stock for two consecutive years with dividends of $1.35 per share.
With the wide range of businesses under their belt including, insurance, apparel, building products, finance and financial products, flight services, retail, grocery distribution and carpet and floor coverings along with an assortment of smaller businesses, PacifiCorp would just be another notch in the belt of Warren Buffet.
His investment strategies have proven to be profitable and his decisions have proven to be knowledgeable and successful. The intrinsic value of the corporation will definitely be of value to Warren Buffett and Berkshire Hathaway based on PacifiCorp’s earnings, financial worth and the value of their assets in years prior to Warren Buffett’s acquisition.
3. How well has Berkshire Hathaway performed? How well has it performed in the aggregate?...
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