A Fair Price Essay

An analysis of Warren Buffet as a superior investor and how this contradicts finance theory and the semi strong form of efficiency. Then on a personal level the ethics and social responsibility underpinning Warren Buffet and his company will be expressed. a) Discuss what can be inferred from the changes in stock price for Berkshire Hathaway Ltd. and Scottish Power plc. on the announcement day of the acquisition? On the 24th of May the public announcement was made that Berkshire Hathaway Ltd, would take over Scottish Powers’ PacifiCorp, a significant effect resulted to the stock prices of both companies respectively.

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The stock price effect is visible in graph 1 & 2 showing the daily prices for May 2005 for both companies. b) Assess the bid for PacifiCorp. Do you think the bid is a “fair” price? In assessing whether the bid price $5. 1 billion dollar is a fair price a valuation of PacifiCorp must be conducted. The model that was implemented to perform the valuation was the DCF method.

The value derived from this methodology was $ 5 119. 348092 million dollars, rather astonishingly close to the bid price of MidAmerican. The DCF model can be found in appendix) Therefore with a value so similar to that of the bid price, it can be ascertained that the bid reflects the company’s value thus is a fair price. CAPM =| RF +| ? | (rm-rt)| 0. 1013 =| 0. 0488+ | 0. 75| (0. 07)| Table [ 1 ] Terminal Valuen = E(FCFE)n+1 /(rn – gn) The DCF model was followed from Rosenbaum’s text (reference) the majority of the inputs have been derived from PacifiCorp’s annual reports. The EBIT has grown at %5. 7 since 2000, signifying good growth signs. This figure combined ith speculation from the 2005 annual report predicting sales to grow at %3 to result in a predicted growth rate of %5 to forecast the FCF’s. A CAPM was used to calculate the cost of equity (as seen in table 1). The industry Beta was used 0. 75(reference), the RFR %4. 88 was derived from the 20 year US Treasury bond rate and the market premium was given at %7. Using these figures cost of equity was found to be %10. 13. Once the cash flows have been forecasted at the 5% growth rate and discounted back at the %10. 13 Ke, then the terminal value must be determined. The terminal value was calculated the below formula, found in Damodorans’ text.

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