Warren E. Buffett, 2015

1. What is your interpretation of the investor reaction to the announcement that Berkshire Hathaway (BRK) would purchase Precision Castparts Corporation (PCP) for a total cost of $37.2 billion? Specifically, what does the decline in BRK stock price imply about the intrinsic value of PCP?

2. Based on the multiples for comparable companies (Exhibit 11), what is the range of possible values for PCP? What concerns do you have about this method of valuation? (For some insights regarding the method of comparables, refer to Chapter 15 in the Ivo Welch text.)

3. * Build Exhibit 12 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. (This exercise provides a preview of the Best Practices discussed in Case 10, of which a quick read might be helpful). On the surface, which cost of capital is the appropriate hurdle rate to evaluate BRKs investment in PCP, i.e. should it be the acquirers WACC or the acquired firms WACC? Why?

4. * Build Exhibit 13 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?

5. Which elements of Buffetts investment philosophy are most essential to this analysis? In your opinion, which if any elements of his philosophy are flawed?