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?
Answer1: The increase in the stock price of Scottish Power plc and Berkshire Hathaway indicate a market approval for the acquisition and created value for both buyers and sellers.
Answer2: a. the possible meaning of the changes in stock price is due to the fact that the deal created value for both buyers and sellers; Berkshire was more diversified after the acquisition.
b. The $2.55 billion gain in Berkshire’s market value of equity implied that the intrinsic value of PacifiCorp was good because it fell within the range of competitors based on the following calculations:
$2.55 billion / 312/18 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 (see Exhibit 9)
Answer3: The possible explanations in the change in stock price for Berkshire would be for a couple of reasons. One of them is that investors invest based on the behavioral finance theory which implies that their investments are driven by psychological factors. These factors would be that believing that Mr. Buffet is the guru of investment, therefore he is right and it must be a very good investment .Moreover looking at the financial statements of march 2005 we see that the book value of PacifiCorp = 3377.1 Billions/312.12 million shares =$10.82 per share. However, the increase of 2.17 billion dollars at the day of the announcements of Berkshire implies that that true value of PacifiCorp should be higher if we divide the 2.17 billions /312.12 million shares we have that the PacifiCorp share should have a $ 6.95 dollar value higher. 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?
Answer1: a. we find the range of possible values for PacifiCorp in Exhibit 10.
i. Revenue median of $6.252 Billion, mean of $6.584 Billion.
ii. EBIT median of $8.775 Billion, mean of $9.289 Billion.
iii. EBITDA median of $9.023 Billion, mean of $9.076 Billion.
iv. Net Income median of $7.596 Billion, mean of $7.553 Billion.
v. EPS median of $4.277 Billion, and a mean of $4.308 Billion.
vi. Book value median of $5.904 Billion, mean of $5.678 Billion.
b. Question about revenue; the implied value of PacifiCorp is giving impractical results for range of revenue as compared to EBIT, EBITDA, & Net income (Expected: Revenue > EBITDA > EBIT > NI).
Alliant E. Corp
Low price P/E =23.50/1.42=16.55
High price P/E =28.80/1.42=20.28
Low price P/E =34.90/1.42 =16.23
High price P/E =42.60/2.15=19.81
Low price P/E =22.70/1,79=12.75
High price P/E =27.20/1.78 =15.28
Low price P/E =32.80/2.34=14.02
High price P/E =39.70/2.34 =16.93
Low price P/E =29.50/2.62=11.26
High price P/E =34.60/2.62 =13.21
Industry average low price P/E=14.20
Industry average high price P/E =17.11
PacifiCorp EPS =0.81
Stock price of PacifiCorp= EPS x (P/E industry)
Range of PacifiCorp possible values
Low price >0.81x14.20= $11.50
High price >0.81x17.11=$13.86
Possible value for PacifiCorp using EBITDA
Total value Company =market value + net debt
Market multiple =total value company /EBITDA
Alliant E. Corp= 7.45x
SCANA Corp 9.25x
Total value of company = Market...
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