Berkshire Hathaway Case Research Paper Example | Topics and Well Written Essays - 1000 words

Berkshire Hathaway Case - Research Paper Example As a result of this strategy, Berkshire Hathaway currently owns a diverse range of business organizations including home furnishings, retail, jewelry sales, uniforms sales, confectionary, and manufacturing of vacuum cleaners. As stated in the annual report (Berkshire Hathaway 2011 annual report, 2011), recently, on 12th February 2010, Berkshire Hathaway completed the acquisition of BNSF by purchasing the remaining 77.5% of BNSF common stock, and currently, BNSF is a wholly owned subsidiary of Berkshire Hathaway Inc. This paper will analyze the reasons for the BNSF acquisition and the principles relating to the finance course. BNSF acquisition The BNSF is North America’s ‘second largest freight railroad network’ and one of the seven Class I railroads (BNSF Railway, n.d.). On 3rd November 2009, Berkshire Hathaway announced that the company would acquire BNSF’s remaining 77.4% stocks that Berkshire Hathaway had not owned at that time. This deal was estimated a t $44 billion, making it the largest acquisition in the history of the Berkshire Hathaway. Buffett â€Å"agreed to buy Burlington for $34 billion or 100 a share† and â€Å"is also taking on about $10 billion of Burlington debt† (Morcroft & Barr, 2009). ... Referring to corporate press releases, the company is currently one of the North America’s leading intermodal freight transporters. In the context of the current economic environment, Buffet believes that this acquisition would contribute to the future growth of the company. He says that â€Å"our country’s future prosperity depends on its having an efficient and well-maintained rail system;† he adds that â€Å"conversely, America must grow and prosper for railroads to do well† (BNSF, Berkshire Hathaway Inc, n.d.). Buffett’s observation is based on the common fact that infrastructure development is a key element of an economy’s overall development. As Morcroft and Barr (2009) point out, through this acquisition, Buffett has invested in a business which is highly sensitive to a possible economic recovery in the United States. It is clear that the US has not yet completely recovered from the shock of the recent global recession. In this economi c environment, railway transportation can be an area that would promote its operations despite the impacts of the recession. Economists predict that BNSF would perform better and contribute to the expansion of Berkshire Hathaway once the economy is recovered. Some recent reports justify the decision of Warren Buffett. In November 2012, the Berkshire Hathaway announced its third quarter operating results. As per the company reports (as cited in Miller, 2012), a combined total of revenues of three segments (railroad, utilities, and energy) increased by 7.5% and reached $8.4 billion as compared to the same period a year ago; the report also indicates that BNSF contributed nearly 63% to this combined

Risk and Return Term Paper Example | Topics and Well Written Essays - 750 words

Risk and Return - Term Paper Example It not only takes into account the risk free rate of return but also includes market risk premium while at the same time taking beta of the stock into account too. (Valuebasedmanagement.net, 2011) This paper will discuss as to how to compute the cost of equity for Wal-Marts while at the same comparing it with other firms. Other models for caluclating cost of equity such as dividend discount model as well as arbitrage pricing theory. 1) Calculations Name of the Company Wal-Mart Nestle McDonald Beta Value 0.371 0.582 0.363 US Treasury (RF) 3% 3% 3% RM-RF 7% 7% 7% Cost of Equity 5.59% 7.06% 5.52% Cost of equity for Wal-Mart is computed in following manner: Rate = RF + Beta x (RM-RF) = 3% + 0.37 (7%) Cost of equity = 5.59% Is this cost of equity higher or lower than you expected? The above calculations suggest that the cost of equity for Wal-Mart is 5.59% which is below the average rate on S&P 500 for an average firm. This cost of equity however, may be considered as adequate or right co nsidering the overall fundamentals of Wal-Mart, its brand image, its global presence as well as the overall industry dynamics. Such low rate of cost of equity therefore indicates that investors are satisfied with the overall strong historical performance of Wal-Mart. Beta values of other companies For the purpose of comparison with Wal-Mart, Nestle as well as McDonalds have been considered as a case study. The tabular calculations are provided in following table: Name of the Company Wal-Mart Nestle McDonald Beta Value 0.374 0.585 0.366 US Treasury (RF) 3% 3% 3% RM-RF 7% 7% 7% Cost of Equity 5.59% 7.06% 5.52% Cost of equity for Nestle Rate = RF + Beta x (RM-RF) = 3% + 0.58(7%) = 7.06% Cost of equity for McDonalds Rate = RF + Beta x (RM-RF) = 3% + 0.36 (7%) = 5.52% The comparison made above shows that the cost of equity of three firms is approximately within a certain range. All three firms have cost of equities which are less than 10% suggesting that the low beta values may have an i mpact on their overall valuation. Beta values always suggest the correlation between the market returns as well as the individual security returns therefore low beta value suggest that the market and the security go hands in hand. The above comparison also shows that these firms are mature firms and are industry leaders with low risk profile therefore investors are relatively satisfied on their ability to operate as a going concern. Further, these firms are mature with stable patterns of earning therefore the overall cost of equity is low due to their low risk. 4) Capital asset pricing model is not the only model to compute the cost of equity as models such as dividend discount model as well as arbitrage pricing theory are other alternatives. Dividend Discount Model is based on the computation of the fair value of any security based on the dividends. (Investopedia.com ). According to this model, the future cash flows to be generated from any given security come in the form of future dividends therefore discounting such cash flows with an appropriate rate can provide a fair indication about the price of a security. The formula is : P0 = D1 / (R-G) D1 is the dividends in the future period 1 whereas R is the required rate of return whereas G suggests the historical growth rate of the dividends. Through manipulation of the above formula, the rate of return through dividend discount model can be computed in following manner: R = D1/P0 + G The required rate o