Q1What 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? Version 1
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)
Version 2The 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.
Q2Based on the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range?
Version 1We 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.
Q3Assess the bid for PacifiCorp. How does it compare with the firm’s intrinsic value?
Tip(If you know what a DCF is, you might try to estimate it.)
Q4Critically assess Buffett’s investment philosophy. Identify points where you agree and disagree with him. Answer (incomplete) Valuing a share based on its relative performance to similar shares is an invaluable strategy to ensure the maximum return on investments. Accounting profit should be used in tandem with intrinsic value as it helps to assess the skill with which management is putting capital to use Accounting profit doesn’t reflect human capital though economic reality doesn’t reflect financial health. Buffett’s advice on investing based on sound research and a detached emotional state, rather than being an…