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Case Studies in Finance
8th Edition
By Robert Bruner
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Complete Case Studies Solutions
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Manual are included.
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* Immediate Download ✅
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* Swift Response ✅
* Teaching Notes ✅
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* Excel Files included ✅
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Warren E. Buffett, 2015
Teaching Note
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Synopsis and Objectives
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Set in August 2015, this case invites students to assess Berkshire Suggested complementary case
Hathaway’s bid for Precision Castparts Corporation (PCP). The task for about investment managers
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students is to perform a simple valuation of PCP and to consider the and superior performance:
reasonableness of Berkshire Hathaway’s offer. Student analysis readily “Larry Puglia and the T. Rowe
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extends to the investment philosophy and the remarkable record of Price Blue Chip Growth Fund”
Berkshire Hathaway’s chair and CEO, Warren E. Buffett. (UVA-F-1772).1
The case affords an introduction to a finance course or a module on
capital markets. The analytical tasks are straightforward and intended to provide a springboard into discussion
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of the main tenets of modern finance. Thus the case would be useful for:
• Setting themes at the beginning of a finance course, including risk and return, economic reality (not
accounting reality), the time value of money, and the benefits of alignment of agents and owners.
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• Linking valuation to the behavior of investors in the capital market.
• Modeling good practice in management and investment using Buffett as an example by returning to the
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image of him repeatedly during a finance course to ask students what Buffett would likely do in a
situation.
• Characterizing intrinsic value as equaling the present value of future equity cash flows.
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• Exercising simple equity-valuation skills by focusing on Buffett’s investment philosophy, basic principles of
value creation, and multiples-valuation information provided in the case.
• Exercising more advanced equity-valuation skills by estimating capital costs, a terminal value, and the
discounted cash flow value from information in the case and teaching note. Used in this fashion, the
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case could be positioned later in the course as a basic introduction to methods of valuing a firm. This
1 Kenneth M. Eades and Dorothy Kelly, “Larry Puglia and the T. Rowe Price Blue Chip Growth Fund,” UVA-F-1772 (Charlottesville, VA: Darden
Business Publishing, 2017).
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Page 2 UVA-F-1769TN
could be accomplished by distributing this note along with focused assignment questions (discussed
below).
Suggested Questions for Advance Assignment
Where this case is to be used in an introductory class, the instructor could assign these questions for
advance preparation by the students:
1. Who is Warren E. Buffett? How would you describe the business of Berkshire Hathaway?
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2. How well has Berkshire Hathaway performed? Over the long term? Recently?
3. What is your assessment of Berkshire Hathaway’s investments in Buffett’s largest equity positions
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shown in case Exhibit 5? Has he been uniformly successful in making major investments?
4. Prepare to describe the elements of Buffett’s investment philosophy. How might this philosophy differ
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from that of other investment styles, such as a very active day trader, a chart watcher, or someone who
passively invests in index funds?
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5. From Buffett’s perspective, what is intrinsic value? Why is it accorded such importance? How is it
estimated? What are the alternatives to intrinsic value? Why does Buffett reject them?
6. Critically assess Buffett’s investment philosophy. Be prepared to identify points where you agree and
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disagree with him.
7. What is the possible meaning of the changes in stock price for Berkshire Hathaway on the day of the
acquisition announcement? Specifically, what does the $4 billion loss in Berkshire Hathaway’s market
value of equity imply about the intrinsic value of Precision Castparts (PCP)?
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8. Should Berkshire Hathaway’s shareholders endorse the acquisition of PCP?
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If the instructor chooses to engage the students in a valuation exercise regarding PCP, the following questions
could be distributed in advance along with the supplemental information given in Exhibit TN1. Also,
spreadsheet models for the student (UVA-F-1769X) and instructor (UVA-F-1769TNX) support the DCF
valuation work.
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9. Based on the multiples for comparable companies, what is the range of possible values for PCP? What
questions might you have about this range?
10. Please forecast and discount the free cash flows to estimate the value of PCP. To do this, you should
estimate PCP’s weighted-average cost of capital (WACC).
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11. Assess the bid for PCP. How does it compare with the firm’s intrinsic value?
Suggested Supplemental Readings
As the case indicates, there is a growing library of books and articles about Buffett and his investment style.
The instructor may choose to assign readings from one or more of the publications listed in Exhibit TN2.
Alternatively, it may be appropriate simply to share the list of books with students to illustrate the breadth of
scholarship and reportage about the Sage of Omaha, Warren Buffett.
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Suggested Teaching Plan
The following questions could be used to motivate an 85-minute discussion of the case:
1. Who is Warren Buffett, and why should anyone pay attention to him? How successful has he been?
The objective of this opening is to tackle at the outset Buffett’s massive reputation as a successful
investor over the long term. Students should cite Berkshire’s stock performance over the long run as
well as its experiences buying equity positions in some of the notable deals listed in case Exhibit 5.
2. What is the business of Berkshire Hathaway? How would you describe the company’s strategy?
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Case Exhibit 4 offers evidence to suggest that Berkshire Hathaway is a conglomerate, as measured by
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revenues and earnings before interest and taxes (EBIT). Measured on assets, however, the company
appears to be concentrated in insurance, which was its core operation for many years. Also, case
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Exhibit 8 presents the acquisition criteria of the company and suggests almost no strategic focus for
acquisitions, consistent with a strategy of unrelated diversification. Another way to describe Berkshire
Hathaway would be as an investment company or mutual fund with an emphasis on private equities
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and total ownership. Finally, Buffett seeks to buy companies with strong brands and positions in stable
markets—the gist of the criticism by the Economist magazine is that Buffett likes to invest in safe
oligopolies. In all of these views, Buffett is the epitome of “patient money,” the opposite of the
impatient trading-oriented investor such as an arbitrageur or hedge-fund investor.
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3. Here are the major elements of Buffett’s philosophy. What do those elements mean? Do you agree with them?
On a side board, list the major topic headings given in the case. The aim here should be to discuss the
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intuition behind each point: why Buffett holds those views and what they imply for his work. If the
students already have been exposed to the major underpinnings of modern finance, this segment of
the discussion would take the form of a quick review. For novices, this segment would warrant slower
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development.
4. What, exactly, does it mean to “create value”?
Case Exhibits 6 and 7 provide a numerical example of value creation and destruction. The instructor
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could invite students to explain what is going on within the exhibits. In essence, value is created where
the return on equity exceeds the cost of equity; and value is destroyed where the return on equity is
less than the cost of equity.
5. What does the stock market seem to be saying about Berkshire Hathaway’s acquisition of PCP?
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This offers the opportunity to develop the notion that stock prices are the present value of expected
cash flows. Moreover, it deals with the immediate opening problem of the case: the market’s response
to the PCP announcement: the loss of 1.1% in Berkshire Hathaway’s market value ($4.05 billion) would
suggest that investors believe Buffett overpaid for PCP. This compares to an increase in the S&P 500
Index of 0.2% the same day. Is a market-adjusted loss of −1.3% (=+0.2% −1.1%) meaningful?
Students may question the efficiency of the market and one’s ability to attach any interpretation to
changes in share prices. The equity markets are not always perfectly efficient. But early in a finance
course, it is useful to introduce the ability to interpret price changes as a vote by investors.
