Warren Buffett, 2005
Case 1 Warren E. Buffett, 2005 Assignment
Please make your answers as complete as possible by explaining/supporting the rationale for your position.
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?
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)
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?
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
Please make your answers as complete as possible by explaining/supporting the rationale for your position.
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?
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)
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?
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