Financial Management Case Analysis at Hult International Business School 2012-2013 |
A) What is the possible meaning of the changes in stock price for GEICO and Berkshire Hathaway on the day of the acquisition announcement?
Specifically, what does the $718 million gain in Berkshire’s market value of equity imply about the intrinsic value of GEICO?
Valuation of GEICO
Warren Buffet bought the company of GEICO for 70$ per share, which he estimated to an appropriate price for the purchase of the company. Warren Buffet is focused on the …show more content…
According to Exhibit 5 we can estimate returns on stock for each year from 1986 to 1994 and annual growth rate on earnings per share.
Scott and Fetzer | Stock retun | Growth on earnings | 23% | 0 | 55% | 121% | 61% | 119% | 49% | 101% | 58% | 105% | 46% | 100% | 58% | 115% | 70% | 110% | 87% | 102% | avarage growth | 109% | growth since 1986 | 197% |
This gives us really good numbers to define company’s performance in acquiring of Scott’s and Fetzer stocks with average return on share of 56% and average growth rate of 109% with a total growth from 1986 to 1994 of 197%.
With the GEICO stock rising with $12.875 to $68.625 on the New York Stock Exchange, Geico Hathaway gained approximately $440 million on their 34.25 million shares in GEICO. During the period from 1976 to 1980 GEICO stock price was seriously damaged by inflation and various other factors. In 1995 original stake of 45,7 million grew to 1,9 billion dollars which is . GEICO paid increased dividends per share from 1976 to 1994 with average return on stock of 13,5%.
Concerning preferred securities, we