Photo 1 question
Photo 2 exhibit 11
Photo 3 exhibit 12
Photo 4 footnote 6
Photo footnote 15
3. Use Exhibit 11 to calculate the weighted average cost of capital (WACC) for both BRK and PCP. Follow the prompts to locate the inputs in the case and perform the calculations. On the surface, which cost of capital is the appropriate hurdle rate to evaluate BRK's investment in PCP? Why? 4. Use Exhibit 12 to forecast the free cash flows from operations a.k.a. "free cash flow to the firm" for three years ahead (2016 through 2018). A terminal value for 2018 is also required to represent an estimate of the cash flows which are expected after the forecast period. The amount of the investment in 2015 and the total cash flows for 2016-2018 will yield an Internal Rate of Return (IRR) and/or a Net Present Value (NPV) for evaluation. Based on this forecast and DCF analysis of the deal, did Buffett pay too much for PCP or did he score a great deal? ase,01,Buffet,2015,eshibits,expanded-1adsx Protected View-Lest saved by user Excel Home Insert Draw Page Layout Formulas Review View Help Tell me what you want to de OTECTED VIEW Be careful files from the Internet can contain viruses. Unless you need to edit it's safer to stay in Protected View Enable Editing P a R Valuation of PCP Based on Multiples for Comparable Firms Enterprise Value as Multiple Company Mv Enterprise Book CY14 MV of Equity as Multiple of: Equity Value Vale Rerv EITDA EBIT Net Income Revenwe EBITDA EBIT Net Income Book Value $13,637 $23,164 $10,599 $23,906 $1,556 $2,185$2,0437 6.51x 10.50 $81 1.16x 7.85x 11.56 Alcoa $1,332 $1,517 $09 $1,307 $193 $131 $9,460 $12,924$3,182 $41,304 $2,290 $1,314 $1,804 $3,193 $2,598 $4,223 $283 $106 6.68x 1.29x 16.36x1.88x $210 0.31x 3.64x 9.84x 45.05x2.97x Allegheny Technologies Carpenter TechnologY (S3) 0.6x 11.28x 3009x $133102x 5.81x 10.47x $1,627 $2,220 $1,326 $2,173 $382 $212 12.23x 1.23 $1,804 $3,193 $,598 $,22 $382 $212 $5,572 $8,603 $3,683 $14,583 $1,341 $790 $49384 7.42x 14.51x 2008x 1.61 $133 097x 651x 10.Gx 14.31x 1.2% Mean Precision Castparts $10,929 $10,005$2,927$2,602$1,530 Implied Value- Median Implied Value Mean $9,205 $19,055 $27,581 $21,894 $14,09 $8,404 $21,718 $37,755 $10,722 $17,596 The calculation of the implied values for PCP based on the median of the peer firms' multiples takes the product of the median value of the multiples of comparable farms (line 8) and multiplies it times the relevant base (revenue, EBITDA, EBIT,net income, or book value) for PCP, The same method is used for the calculation of the implied value based on the average or mean of the peer firms' multiples (line 9 For instance, the implied value based on the median multiple of EBIT S17 755 million is derived by muh p.ing IASI the mean EBIT multiple for the comparable firms) times $2,602 million(the EBIT of PCP) Data source: Factset pnded-1alsx - Protected Viw Lest saved by ser Excel Fle HomeDraw Page Layout Formulas Dats Review View Help Tell me what you want to do PROTECTED VIEW Be careful-files from the internet can contain viruses. Unless you need to edit, i's safer to stay in Protected View. Enable E Exhibit 12 Weighted Average Cost of Capital (WACC)Estimates for PCP and BRK Source Calculation PCP view BRK view Cost of Equity 10 Market Return Risk free rate Market Fosk Premium Beta Cost of equity capital Footnote 6 and 15 Footnote 15 Calculate MAp Footnote 15 Cakculate 13 Market retum . Risk free rate of equity captal - Rsk-hee rate + Beta x MRP) 16 Cost of Debt AA-rated corporate bond yield Marginal tax rate Atter-tax cost of debt Foctmote 15 Footmote 15 Calculate 20 Atertax cost of debt Pre-ax cost of debt K (1-Margnal tax rate) Component Weights mlions of dollars) ong-term debt as of 8/10/15 Fostnote 1 Footnote to Exhbit9 CakculaeEneerpise value (EV)-value of long-term debt + MV of equty 26 NA MV of equty (pre-announce) Enterprise value (pre-announce) %Debt 28 29 Calculate for pop gen n Footnote 15 for BRK Calculate for PCP, gven n Footnote 15 for BRK % Debt-Longterm debtTetal EV % Equty-MV of equty Total EV %Equity 32 O Type here to search 61n comparison, the annual average total return on all large stocks from 1965 to the end of 2014 was 9.9%. (See Warren Buffett, annual letter to shareholders, 2014.) "warren Buffett, annual letter to shareholders, 2001. Warren Buffett has since pledged to donate 99% of his net worth to philanthropic foundations. See http://givingpledge.org. "Berkshire Hathaway Inc. annual report, 2004. "Berkshire Hathaway's 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 PCP's cash flows would grow indefinitely at about the long-term expected real growth rate of the U.S. economy, 2.5%. 3. Use Exhibit 11 to calculate the weighted average cost of capital (WACC) for both BRK and PCP. Follow the prompts to locate the inputs in the case and perform the calculations. On the surface, which cost of capital is the appropriate hurdle rate to evaluate BRK's investment in PCP? Why? 4. Use Exhibit 12 to forecast the free cash flows from operations a.k.a. "free cash flow to the firm" for three years ahead (2016 through 2018). A terminal value for 2018 is also required to represent an estimate of the cash flows which are expected after the forecast period. The amount of the investment in 2015 and the total cash flows for 2016-2018 will yield an Internal Rate of Return (IRR) and/or a Net Present Value (NPV) for evaluation. Based on this forecast and DCF analysis of the deal, did Buffett pay too much for PCP or did he score a great deal? ase,01,Buffet,2015,eshibits,expanded-1adsx Protected View-Lest saved by user Excel Home Insert Draw Page Layout Formulas Review View Help Tell me what you want to de OTECTED VIEW Be careful files from the Internet can contain viruses. Unless you need to edit it's safer to stay in Protected View Enable Editing P a R Valuation of PCP Based on Multiples for Comparable Firms Enterprise Value as Multiple Company Mv Enterprise Book CY14 MV of Equity as Multiple of: Equity Value Vale Rerv EITDA EBIT Net Income Revenwe EBITDA EBIT Net Income Book Value $13,637 $23,164 $10,599 $23,906 $1,556 $2,185$2,0437 6.51x 10.50 $81 1.16x 7.85x 11.56 Alcoa $1,332 $1,517 $09 $1,307 $193 $131 $9,460 $12,924$3,182 $41,304 $2,290 $1,314 $1,804 $3,193 $2,598 $4,223 $283 $106 6.68x 1.29x 16.36x1.88x $210 0.31x 3.64x 9.84x 45.05x2.97x Allegheny Technologies Carpenter TechnologY (S3) 0.6x 11.28x 3009x $133102x 5.81x 10.47x $1,627 $2,220 $1,326 $2,173 $382 $212 12.23x 1.23 $1,804 $3,193 $,598 $,22 $382 $212 $5,572 $8,603 $3,683 $14,583 $1,341 $790 $49384 7.42x 14.51x 2008x 1.61 $133 097x 651x 10.Gx 14.31x 1.2% Mean Precision Castparts $10,929 $10,005$2,927$2,602$1,530 Implied Value- Median Implied Value Mean $9,205 $19,055 $27,581 $21,894 $14,09 $8,404 $21,718 $37,755 $10,722 $17,596 The calculation of the implied values for PCP based on the median of the peer firms' multiples takes the product of the median value of the multiples of comparable farms (line 8) and multiplies it times the relevant base (revenue, EBITDA, EBIT,net income, or book value) for PCP, The same method is used for the calculation of the implied value based on the average or mean of the peer firms' multiples (line 9 For instance, the implied value based on the median multiple of EBIT S17 755 million is derived by muh p.ing IASI the mean EBIT multiple for the comparable firms) times $2,602 million(the EBIT of PCP) Data source: Factset pnded-1alsx - Protected Viw Lest saved by ser Excel Fle HomeDraw Page Layout Formulas Dats Review View Help Tell me what you want to do PROTECTED VIEW Be careful-files from the internet can contain viruses. Unless you need to edit, i's safer to stay in Protected View. Enable E Exhibit 12 Weighted Average Cost of Capital (WACC)Estimates for PCP and BRK Source Calculation PCP view BRK view Cost of Equity 10 Market Return Risk free rate Market Fosk Premium Beta Cost of equity capital Footnote 6 and 15 Footnote 15 Calculate MAp Footnote 15 Cakculate 13 Market retum . Risk free rate of equity captal - Rsk-hee rate + Beta x MRP) 16 Cost of Debt AA-rated corporate bond yield Marginal tax rate Atter-tax cost of debt Foctmote 15 Footmote 15 Calculate 20 Atertax cost of debt Pre-ax cost of debt K (1-Margnal tax rate) Component Weights mlions of dollars) ong-term debt as of 8/10/15 Fostnote 1 Footnote to Exhbit9 CakculaeEneerpise value (EV)-value of long-term debt + MV of equty 26 NA MV of equty (pre-announce) Enterprise value (pre-announce) %Debt 28 29 Calculate for pop gen n Footnote 15 for BRK Calculate for PCP, gven n Footnote 15 for BRK % Debt-Longterm debtTetal EV % Equty-MV of equty Total EV %Equity 32 O Type here to search 61n comparison, the annual average total return on all large stocks from 1965 to the end of 2014 was 9.9%. (See Warren Buffett, annual letter to shareholders, 2014.) "warren Buffett, annual letter to shareholders, 2001. Warren Buffett has since pledged to donate 99% of his net worth to philanthropic foundations. See http://givingpledge.org. "Berkshire Hathaway Inc. annual report, 2004. "Berkshire Hathaway's 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 PCP's cash flows would grow indefinitely at about the long-term expected real growth rate of the U.S. economy, 2.5%
