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Case
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Reference no. UVA-F-1160
Published by: Darden Business Publishing
Originally published in: 1996
Version: 12.2001
Length: 19 pages
Data source: Published sources

Abstract

Set in August 1995, this case invites the student to assess Berkshire Hathaway''s bid for that percentage of GEICO Corporation that it does not already own. The student''s tasks are to perform a simple valuation of GEICO shares and to consider the reasonableness of the 26 percent acquisition premium. There are no obvious synergies, and Berkshire Hathaway has announced that it will run GEICO with no changes. Student analysis readily extends to the investment philosophy and remarkable record of Berkshire''s CEO, Warren E Buffett. The case was prepared for use as an introduction to a finance course or a module on capital markets. The analytical tasks are straightforward and are intended to provide a springboard for a discussion of the main tenets of modern finance. Thus, the case can be used to: (1) set some of the important themes at the beginning of a finance course, including risk-and-return, economic reality (ie, not accounting reality), time value of money, and the benefits of alignment of agents and owners; (2) link concepts of valuation and corporate finance to the behavior of investors in the capital market; (3) through the use of an exemplar (Buffett), hint at the nature of ''best practice'' in management and investment (one can return to the image of Buffett repeatedly during a finance course to ask students what he would likely do in a situation); (4) build the notion of stock prices equaling the present value of future equity cash flows; and (5) exercise simple equity-valuation skills using DCF analysis.
Location:
Size:
Large
Other setting(s):
1995

About

Abstract

Set in August 1995, this case invites the student to assess Berkshire Hathaway''s bid for that percentage of GEICO Corporation that it does not already own. The student''s tasks are to perform a simple valuation of GEICO shares and to consider the reasonableness of the 26 percent acquisition premium. There are no obvious synergies, and Berkshire Hathaway has announced that it will run GEICO with no changes. Student analysis readily extends to the investment philosophy and remarkable record of Berkshire''s CEO, Warren E Buffett. The case was prepared for use as an introduction to a finance course or a module on capital markets. The analytical tasks are straightforward and are intended to provide a springboard for a discussion of the main tenets of modern finance. Thus, the case can be used to: (1) set some of the important themes at the beginning of a finance course, including risk-and-return, economic reality (ie, not accounting reality), time value of money, and the benefits of alignment of agents and owners; (2) link concepts of valuation and corporate finance to the behavior of investors in the capital market; (3) through the use of an exemplar (Buffett), hint at the nature of ''best practice'' in management and investment (one can return to the image of Buffett repeatedly during a finance course to ask students what he would likely do in a situation); (4) build the notion of stock prices equaling the present value of future equity cash flows; and (5) exercise simple equity-valuation skills using DCF analysis.

Settings

Location:
Size:
Large
Other setting(s):
1995

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