Berkshire Hathaways cost of equity was 9.2%, which reflected a beta of 0.90, an expected market return of 9.90%, and a risk-free rate of 2.89%. The yield on corporate bonds rated AA was 3.95%and after a 39% expected marginal tax rate, the cost of debt would be 2.3%. Weights of capital were 16.9% for debt and 83.1% for equity. In contrast, the beta for PCP was 0.38. Analysts expected that PCPs cash flows would grow indefinitely at about the long-term expected real growth rate of the U.S. economy, 2.5%."
Q2:
BH PCP Cost of Equity Description Market return Risk free rate Market risk premium Beta Cost of equity II RF + (Rm - RF) + B + ( Cost of Equity Risk Free Rate Market Risk = Premium ) X Beta Cost of Debt Pre-tax cost of debt Expected marginal tax rate After-tax cost of debt WACC E D (re) + (rd)(1 t) D+E Where: E = market value of equity D= market value of debt re = cost of equity Id = cost of debt t = corporate tax rate Weights Long-term debt ($ millions) MV equity ($ millions) % Debt % Equity Weighted average cost of capital (WACC) WACC Assumptions Terminal Growth Rate WACC (calculated in "WACC tab) Revenue Growth Estimate '16 EBT Margin Estimate '16 Tax Rate '16 Depr and Amort as a % of Sales Cap Ex as a % of Sales Working Capital as a % of Sales Hints given calculate same as 2015 same as 2015 given same as 2015 same as 2015 same as 2015 2013 2014 2015 2016E Revenue - Cost of sales and operating expenses $ $ 8,347.00 $ 6,188.00 $ 9,533.00 $ 10,005.00 6,874.00 $ 7,393.00 NO Profit before Tax - Taxes at 39% $ $ 2,159.00 $ 842.01 $ 2,659.00 $ 1,037.01 $ 2,612.00 1,018.68 Profit after Tax + Depreciation & amortization - Capital expenditures - Increase net working capital A A A A 1,316.99 $ 214.90 $ 323.00 $ 653.00 $ 1,621.99 $ 293.00 $ 355.00 $ 531.00 $ 1,593.32 325.00 457.00 (754.00) Free Cash Flow from Operations $ 555.89 $ 1,028.99 $ 2,215.32 Supplemental: Working capital $ 3,368.00 $ 3,899.00 $ 3,145.00 BH PCP Cost of Equity Description Market return Risk free rate Market risk premium Beta Cost of equity II RF + (Rm - RF) + B + ( Cost of Equity Risk Free Rate Market Risk = Premium ) X Beta Cost of Debt Pre-tax cost of debt Expected marginal tax rate After-tax cost of debt WACC E D (re) + (rd)(1 t) D+E Where: E = market value of equity D= market value of debt re = cost of equity Id = cost of debt t = corporate tax rate Weights Long-term debt ($ millions) MV equity ($ millions) % Debt % Equity Weighted average cost of capital (WACC) WACC Assumptions Terminal Growth Rate WACC (calculated in "WACC tab) Revenue Growth Estimate '16 EBT Margin Estimate '16 Tax Rate '16 Depr and Amort as a % of Sales Cap Ex as a % of Sales Working Capital as a % of Sales Hints given calculate same as 2015 same as 2015 given same as 2015 same as 2015 same as 2015 2013 2014 2015 2016E Revenue - Cost of sales and operating expenses $ $ 8,347.00 $ 6,188.00 $ 9,533.00 $ 10,005.00 6,874.00 $ 7,393.00 NO Profit before Tax - Taxes at 39% $ $ 2,159.00 $ 842.01 $ 2,659.00 $ 1,037.01 $ 2,612.00 1,018.68 Profit after Tax + Depreciation & amortization - Capital expenditures - Increase net working capital A A A A 1,316.99 $ 214.90 $ 323.00 $ 653.00 $ 1,621.99 $ 293.00 $ 355.00 $ 531.00 $ 1,593.32 325.00 457.00 (754.00) Free Cash Flow from Operations $ 555.89 $ 1,028.99 $ 2,215.32 Supplemental: Working capital $ 3,368.00 $ 3,899.00 $ 3,145.00
