Part 1: Using Excel, calculate the range of potential values for PacificCorp (us
ID: 2773046 • Letter: P
Question
Part 1: Using Excel, calculate the range of potential values for PacificCorp (using the multiples for
comparable regulated utilities) - the core information is provided in Exhibit 10. Prepare a spreadsheet to
recreate the values for PacificCorp - show all work, formulas, and values. As hints for helping to
complete Part 1, reference the following:
• Copy Exhibit 10 into a spreadsheet – recalculate all values using formulas
• Create the formula to calculate the values for PacificCorp - using the data provided - you are trying to
reverse engineer - how was $6,252 (Enterprise Value as a Multiple of Revenue) derived.
• NOTE: You are given the answers - I would like you to do the work to derive the values (e.g., use
formula to calculate the values).
Part 2: In a Word document, summarize answers to the following questions - your document should be 3-
4 pages (enough to answer the questions thoroughly, but, concise for an executive audience):
1) Describe what Warren Buffet considers "intrinsic value." Why is it accorded such importance, how is
it estimated? What alternatives are there to intrinsic value and why does Buffet reject them?
2) Assess the bid for PacificCorp (based on your analysis of the potential values). How does it compare
to the firm's values?
3) How well do you think Berkshire Hathaway has performed? What are the criteria for your
assessment?
4) If you were a shareholder of Berkshire Hathaway, would you endorse the acquisition of PacificCorp?
Why or why not?
see below for exhibit 10 details
(dollars in millions) Enterprise Value as Multiple of: MV Equity as Multiple of: MV Equity in $ Enterprise Value in $ book value in $ EPS in $ Rev EBIT EBITDA Net Income EPS book value Alliant Energy Corp 3,333 5,600 $2,805 1.42 1.89x 13.33x 7.45x 34.15x 20.33x 1.19x Cinergy Corp. 7,989 13,231 $4,178 2.15 2.82x 17.93x NA 32.75x 19.77x 1.91x NSTAR 2,898 5,287 1,484 1.78 1.79x 11.62x 7.53x 27.83x 15.25x 1.95x SCANA Corp. 4,486 7,967 2,566 2.34 2.05x 13.37x 9.25x 30.18x 16.99x 1.75x Wisconsin Energy Corp. 4,048 7,691 2,522 2.62 2.24x 14.51x 8.97x 25.13x 13.23x 1.61x Median 4,048 7,691 2,566 2.15 2.05x 13.37x 8.25x 30.18x 16.99x 1.75x Mean 4,551 7,955 2,711 2.06 2.16x 14.15x 8.30x 30.01x 17.11x 1.68x Implied Value of PacifiCorp1 3,377 0.81 6,252 8,775 9,023 7,596 4,277 5,904 6,584 9,289 9,076 7,553 4,308 5,678Explanation / Answer
Answer:Part1: 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
Answer:PArt 2:
1)a. The discounted value of the cash that can be taken out of a business during its remaining life. Intrinsic value is per-share progress. Buffett assessed intrinsic value as the present value of future expected performance.
b. Because if focuses on ability to earn returns in excess of the cost of capital, not accounting profit. Only logical way to evaluate the relative attractiveness.
c. The gain in intrinsic value could be modeled as the value added by a business above and beyond the charge for the use of capital in that business.
d. Accounting profit, performance of Berkshire by its size, consolidated reported earnings
e. Accounting reality was conservative, backward looking, and governed by GAAP (measures in terms of net profit). Investment decisions should be based on economic reality. This includes intangible assets such as patents, trademarks, special managerial expertise, reputation, etc.
2) If you use CAPM for the simple DCF analysis:
K=rf+B(rm-rt)
rf=5.762
B=.75
K=5.762+.75(10.5-5.762)
=9.32%=Discount rate
rm=10.5
$5.1/(1+.0932)=$4.76 => it is in range of the rest of the comparable firms
3)It has performed very well. Berkshire Hathaway has consistently outperformed the market since its inception in 1965. In 1977, the firm’s year end closing share price was $107; on May 24, 2005 the closing price on its Class A shares reached $85,500. Berkshire has had an annual increase of wealth of 24% since 1965, which is more than double the 10.5% of the average increase for other large stocks. It started out with a decline due to inflation, technological change, and intensifying competition from foreign competitors, but has recuperated well after closing the textile side of their business. Berkshire Hathaway had recently been performing below S&P 500 Index according to Exhibit 1, from April 2005 to May 2005. Scottish Power had consistently outperformed the S&P 500 Index from March to May 2005. This probably was one aspect that attracted Berkshire to purchase PacifiCorp. We believe that it was a good investment. In 2002 they owned 9.9% of the voting interest and 83.7% of the economic interest in the equity of MidAmerican. This allows them to have a major stake in the company without violating utility laws, which has proven to be successful for them. According to Exhibit 6, MidAmerican Holdings had a net earnings of 170 million in 2004, but compared to 2003 net earnings of 416 million, MidAmerican had a net loss from 2003-2004. Acquiring PacifiCorp would supply much needed new, more profitable investments to raise their net income in 2005
They invested in well established and successful firms. They put a lot of money up front for these investments, but since have made substantial gains for their investment. The total cost to Berkshires investment in the Big 4 was $3.832 Billion, but the market value of their investment was $24.681 Billion. This means that Berkshire’s current gain on their investment in the big 4 is $20.849 Billion. Their gain is 5.44 times their investment I would have to say that these were very well thought out and successful investments.