A: the Intrinsic value Is not a precise figure, which Is estimated under various tuitions. Thus, under the fixed interest rates and forecast of future cash flows, the intrinsic value of a company or a capital can be estimated that the future value created during its remaining life divides the discount rate for those years. What are the alternatives to Intrinsic value? A: the Intrinsic value alms to estimate the real value of a business. Therefore, the alternatives can be the book value, market value, fair value, etc.
Why does Buffet reject them? A: As we all know, Buffet does not try to “time the market” -?his Is a strategy of patient, long-term Investing. He Is used to Invest a product In long run. Meanwhile, the intrinsic value focuses on the future profitability, and then discounts it to the current cash value. That meets Buffet’s investment philosophy. (b) Identify points where you agree and disagree with Buffet. A: Agree. The philosophy-? Investing behavior should be driven by information, analysis, and self-discipline, not be emotion or “hunch”.
Investment is a rational activity and the decisions should be made after analyzing all of the gained Information. The impulse In Investing behavior may make profit once or twice, but It will lose In the long term. That is the reason why the benefit of retail investors is easily to be damaged in stock market. However, there is a same situation to the professional investor. As Benjamin Graham believed that an investor’s worst enemy was not the stock market, but oneself.
Over the long term, stock prices should have a strong relationship with the economic progress of the business. Disagree, The philosophy-? Risk and discount rates. It said that Buffet argued that he avoided risk. And therefore should use a “risk-free” discount rate. His film used almost no debt financing. He focused on companies with predictable and stable earnings. In my mind, the risk cannot be avoided, and what can be done is just reducing it. As Buffet thought, his firms hardly had debt financing, then there was no risk affected the earning of companies.
However, as we all know, there may have bad debts In business and trade, which can Impact earnings as well. Meanwhile, the risk may be Incurred by the external of companies. For instance, the 2008 Financial Crisis and the recently event that American sovereign ratings was dropped from AAA to AAA+ might both have influence on Buffet’s firms one owns, the higher discount rates one will be. Just like the car insurance, the more accident a car suffers, the more car insurance it should be paid. Nevertheless, on the side of Buffet, it may be the perfect thinking.
Because it matches with Buffet’s theory to estimate the intrinsic value and it is said that Buffet often decides an investment within 30 minutes. In such short time and large workload, the simple is the best. (b) Should Berkshire Hatchways shareholders endorse the acquisition of Pacific? A: I do not think shareholders should endorse it. Firstly, Buffet have stated and implied that the firm’s goal of annual growth rate was 1 5%, even after acquiring Pacific, but there was no data shown to support it. Meanwhile, there was another acquisition case can be used to compare this.
Duke Energy acquired Generic for $9 billion. From EXHIBIT 9, it shows that the profitability of Pacific is much less than that of Generic Corporation. Last but not the least, comparing the figures EXHIBIT 6 and 7, in Pacific the annual growth rate in shareholder between year 2004 and 2005 was about 1 . 72%, which was far lower than that of Meandering Energy Holdings Corporation shown in EXHIBIT 6. Case studies in finance, sixth edition, 7 Case studies in finance, sixth edition, 10 Case studies in finance, sixth edition, 9
