Berkshire Instruments Casestudy

In: Business and Management

Submitted By mdarter12345
Words 1670
Pages 7
Berkshire Instruments
Cost of Capital

A1 Hansen, the newly appointed vice president of finance of Berkshire Instruments, was eager to talk to his investment banker about future financing for the firm. One of Al's first assignments was to determine the firm's cost of capital. In assessing the weights to use in computing the cost of capital, he examined the current balance sheet, presented in Figure 1.

In their discussion, Al and his investment banker determined that the current mix in the capital. structure was very close to optimal and that Berkshire Instruments should continue with it in the future. Of some concern was the appropriate cost to assign to each of the elements in the capital structure. Al Hansen. requested that his administrative assistant provide data on what the cost to issue debt and preferred stock had been in the past. .The information is provided in Figure 2.

When Al got the data, he felt he was making real progress toward determining the cost of capital for the firm. However, his investment banker indicated that he was going about the process in an incorrect manner. The important issue is the current cost of the funds, not the historical cost. The banker suggested that a comparable firm in the industry, in terms of size and bond rating (Baa), Rollins Instruments, had issued bonds a year and a half ago for 9.3 percent interest at a $1,000 par value, and the bonds were currently selling for $890. The bonds had 20 years remaining to maturity. The banker also observed that Rollins Instruments had just issued preferred stock at $60 per share, and the preferred stock paid an annual dividend of $4.80.

In terms of cost of common equity, the banker suggested that A1 Hansen use the dividend valuation model as a first approach to determining cost of equity. Based on that approach, Al observed that earnings were $3 a share and that 40 percent…...

Similar Documents

Berkshire

...Colin Drury, Management and Cost Accounting – Berkshire Threaded Fasteners Company Berkshire Threaded Fasteners Company Professor John Shank, The Amos Tuck School of Business Administration Dartmouth College This case is reprinted from Cases in Cost Management, Shank, J. K., 1996, South Western Publishing Company. The case was adapted by Professor John Shank, with permission from the author from an earlier case written by J. P. Culliton, Harvard Business School. The case was originally set in the mid 1970's. In February 2000, Brandon Cook was appointed general manager by Joe Magers, president of Berkshire Threaded Fasteners Company. Cook age 56, had wide executive experience in manufacturing products similar to those of Berkshire. The appointment of Cook resulted from management problems arising from the death of John Magers, founder and until his death in early 1999, president of the company. Joe Magers had only four years experience with the company and in early 2000 he was 34 years old. His father had hoped to train Joe over a 10-year period, but the father's untimely death had cut this seasoning period short. The younger Magers became president after his father's death, and he had exercised full control until he hired Cook. Joe Magers knew that he had made several poor decisions during 1999 and that the morale of the organization had suffered, apparently through lack of confidence in him. When he received the income statement for 1999 (Exhibit 1), the loss of over......

Words: 1918 - Pages: 8

Jp Morgan and Berkshire Hathaway

...J. P. Morgan and Berkshire Hathaway From 1820 to 1870, the Industrial Revolution brought innovations and growth to America’s economy. Of those breakthroughs rose the railroad and textile industries. With the railways falling into debt, John Pierpont Morgan was asked to intervene. Multiple railroads fell under his control due to his reorganization of the industry and his actions came to be known as “morganization.” Founded in 1889 as Berkshire Cotton Manufacturing Company, Berkshire Fine Spinning Associates became one of the largest textile industries in the world. It was later recognized by Warren Buffett who seized control of the company and used it for further investments. This essay focuses on the question of: what can be learned by examining Morgan’s consolidation of the railroad industry and Berkshire’s astonishing growth? This era marked a shift to powered, special-purpose machinery, factories and mass production. Industrialization in America involved three important developments: the harnessing of electricity, improvements to the industrial process including the acceleration of production, and lastly the expansion of transportation. An improved transportation system was crucial for raw materials to reach the factories and manufactured goods to reach consumers. Morgan was fixated on the restructuring of railways and began by proposing agreements between major lines. “Oppressed by debt and overbuilding, more than a third of the country’s railway trackage fell......

Words: 1162 - Pages: 5

Berkshire Hathaway Analysis

...Berkshire Hathaway Summary Facts about the Firm Berkshire Hathaway is an American multinational company based out of Omaha, Nebraska, USA & does not resemble the original company that Buffett had bought during the 1960’s. As of 2008, it was active in a variety of sectors, including insurance, regulated utilities & retailing. It is a holding company that manages a number of subsidiary companies belonging to the companies in these variety sectors. In 2008, the revenues of the conglomerate had become $81.7 bn. Warren Buffett has been at the helm of affairs since the inception & still remains the current Chairman and CEO. Charlie Munger, who is his best advisor and has been attached since early days to Buffett is the current Vice-Chairman. Analysis After gaining some experience in investing in firms, his first moderately successful venture being the Dempster Mill Manufacturing, Buffett bought Berkshire Hathaway, a textile mill which he was tracking from some years and then started looking out for other investing opportunities from the profits he made. His target over the years was to invest and acquire Insurance firms which would give him the extra cash needed to invest elsewhere. He carried on a spate of acquisitions over the years using the below acquisition criteria: - * Large purchases (at least $75 million of pre-tax earnings) * Demonstrated consistent earning power (sustainability of the business) * Businesses earning good returns on equity...

Words: 860 - Pages: 4

Berkshire Hathaway

...Presentation "Greetings, introducing names", we are going to present you today how the Berkshire Hathaway's acquisition criteria, operating principled and incentives work together to enforce hte values of responsibility and trust, which the Berkshire Hathaway model is predicated on. Our presentation outline includes the company's history; its unique approach in corporate governance; the secret of success in terms of acquisition using human resources wisely and effectively; the company's culture and conclusions. Initially, Berkshire Hathaway is one of the largest corporations in the world, which has significant minority hildings in American Express, M&T Bank, Procter & Gamble and IBM. It is known for its control by the investor Warren Buffet, who is the company's chairman and CEO. Berkshire Hathaway traces its roots to a textile manufacturing company established by Oliver Chace in 1839 and its business units employ over 250,000 employees. Being built on a model based on centralization of capital allocation decisions within corporate headquarters along with extreme decentralization of operating decisions within individual business units, Berkshire Hathaway showed an absolutely unique approach in corporate governance that works effectively. Despite the company has a considerable number of employees – over 250,000 individuals – managers, who oversee each unit, hold complete discretion over operating and capital decisions within their businesses, without......

Words: 1007 - Pages: 5

Casestudy

...Financing: MCB Corporate Financing provides access to diversified financing options, including working capital loans, term loans, trade finance services and investment banking. MCB Project & Structured Finance: Involves financing complex projects, usually in an SPV(special purpose vehicle/entity) structure, where the loan is tightly structured around the cash flows, risks are allocated amongst various stakeholders, and there is limited or no recourse to the sponsors. MCB Syndicated Loans And Debt Capital Markets: It involves arrangement, underwriting and placement services for significant financing requirements by large corporate and institutional clients to other financial institutions or through the debt capital markets. Instruments MCB Quasi Equity/Hybrid: It structures and places a category of debt that has some characteristics of equity such as being unsecured, subordinated or with a potential equity upside. MCB Equity Capital Raising: Equity Services relate to raising capital for our clients by offering common or preferred equity to public or private investors, through initial public offers, offers for sale, rights issues and private equity placements. MCB Advisory Services: Financial and Capital Raising Advisory provides our clients with financial advisory services, commercial structuring support and access to capital resources to help companies successfully finance their business/project. MCB Islamic Banking: With the help of Shariah(rule of......

Words: 12394 - Pages: 50

Casestudy

...to take advantage of such skills. As an organization builds out its reporting requirements, the data services and operations team should become responsible for the reporting layer. While team members may not focus on defining metrics, they are critical in ensuring that the reports are delivered in a timely manner. Therefore, collaboration between data services and decision sciences is absolutely essential. For example, while a metric may be easy to define on paper, implementing it as part of a regular report may be unrealistic: the database queries required to implement the metric may be too complex to run as frequently as needed. Data engineering and infrastructure It’s hard to understate the sophistication of the tools needed to instrument, track, move, and process data at scale. The development and implementation The Roles of a Data Scientist | 9 of these technologies is the responsibility of the data engineering and infrastructure team. The technologies have evolved tremendously over the past decade, with an incredible amount of collaboration taking place through open source projects. Here are just a few samples: • Kafka, Flume, and Scribe are tools for streaming data collection. While the models differ, the general idea is that these programs collect data from many sources; aggregate the data; and feed it to a database, a system like Hadoop, or other clients. • Hadoop is currently the most widely used framework for processing data. Hadoop is an open source......

Words: 8024 - Pages: 33

Berkshire Hathaway

...Individual Assignment BERKSHIRE HATHAWAY Assignment Report Submitted by: Sudipt Tewari | G13051 | Case Summary: Berkshire Hathaway, Inc.’s chairman and CEO Warren Buffett, is the world's third richest man. He invested in Berkshire Hathaway in 1962, and by 1963, Buffett was Berkshire’s largest shareholder. Buffett started purchasing other businesses, which were primarily insurance companies, with profits from the declining original textile business. In 1985, the original textile business was shut down and Berkshire Hathaway diversified into higher margin businesses. Now, Berkshire Hathaway is active in a variety of sectors, including insurance, regulated utilities and retailing. One of the companies that Berkshire Hathaway holds is GIECO (Government Employees Insurance Company). In 1995, GIECO was wholly owned by Berkshire Hathaway. By 2005, its market share was increased from 1.9 percent to 6.1 percent with underwriting revenues of additional $590 million in cash from operating earnings in spite of decline in insurance industry. Another major company under Berkshire Hathaway is Nebraska Furniture Mart. It is a large furniture store, which holds NFM Mega Mart and Homemakers Furniture. Warren Buffett utilizes a constant strategy to manage these companies including Berkshire Hathaway by holding shares for a long time. Berkshire Hathaway does not pay any dividends to the shareholders but reinvests surplus instead to maximize the value of the company. Under this......

Words: 800 - Pages: 4

Casestudy

...data analysis and decision modeling, oriented toward future planning, and used at irregular, unplanned intervals. importance of DSS to assist in high-level decision-making, assist academic advising staff, improve the quality and timeliness of marketing decisions, and medical diagnosis process; and current issues of DSS where decision-making as the most important activities for human beings, Clinical Decision Support Systems (CDSSs), several types of DSS usage and deployment, and Social decision support system (SDSS) . In contrast, Keen (1980) claims that it is impossible to all give the a precise of definition the DSS. 1. Introduction Information Systems (IS) play a vital role in the decision-making process. IS are tools and instruments engaged in recording, analyzing, and disseminating strategic information within the organization. DSS as interactive including facets Nevertheless, according to Power (1997), the term decision support system remains a useful and inclusive term for many types of information systems that support decision making. He humorously adds that every time a computerized transaction system processing is not system an on-line (OLTP), Information Technology (IT) based systems, which utilize data and models to solve unstructured problems and, thereby, speed up the decision-making process. someone will be tempted to call it a DSS. As you can see, there is no universally accepted definition of DSS. 1 ensure the system is......

Words: 1600 - Pages: 7

Berkshire Hathaway

...Berkshire Hathaway Berkshire Hathaway is a holdings company operated by Warren Buffett and Charles Munger. The company was founded in the 1800’s as a textile mill, and through a series of mergers became known as Berkshire Hathaway. Buffett took control of the company in the 1960’s and transformed it from a failing textile mill into a very successful holdings company. Berkshire Hathaway’s main investments are insurance companies such as GEICO, financial institutions such as Wells Fargo, goods companies such as Coca-Cola, and newspapers such as The Washington Post. The company’s financial situation is very strong, with increasing assets, equity, and revenue. The company has several large competitors such as The Allstate Corporation and BlackRock, Inc., as well as many others. However, Berkshire constantly outperforms not only its competitors, but also the market. Berkshire Hathaway is a holdings company that owns businesses in a variety of business activities. The company was founded in 1839 as a textile mill known as The Valley Falls Company and through a series of mergers became known as Berkshire Hathaway. Warren Buffett, the world’s greatest investor, started buying stock in the company in 1962 (Finkle 2010). By the mid 1960’s, Buffett owned enough of the company to change the management and basically take control of the company. Buffett realized that the textile industry was in a decline, so he used the company as an investment vehicle in addition to its textile...

Words: 1859 - Pages: 8

Berkshire Hathway

...Berkshire Hathaway is an American multinational conglomerate holding company. It was founded in 1888 by Horatio Hathaway. At this time, the company was named the Hathaway Manufacturing Company. When the merger of Berkshire Fine Spinning Associates and the Hathaway Manufacturing Company took place it was named Berkshire Hathaway. Before the combining of these companies, Hathaway Manufacturing Company was its own successful business until World War I caused it to suffer. The combination that created Berkshire Hathaway had fifteen plants. These plants employed over twelve thousand people and represented one hundred and twenty million dollars in revenues. In 1962, Warren Buffett, noticed stock price direction. Buffett brought great importance to the company because of the interest he showed. He bought enough shares that the company decided to buy back his shares for slightly less than pleased by him. This caused Buffett to buy even more stocks to take control of the company. The effort shown by Buffett resulted in him to gain control of most of the company. It was then brought to a new level, thanks to Buffett, as he expanded the company into the insurance industry, utilities and energy, finance and financial products and flight services. The first new investments included National Indemnity Company and the Government Employees Insurance Company (GEICO). These companies formed the foundation of its insurance companies, and are a major source of the company's capital.......

Words: 1956 - Pages: 8

Casestudy

...These six banks, which are generally, referred to as the Systemically Important Banks (SIBs), represented 77 per cent of the LCB sector assets and 65 per cent of the banking sector assets. The LSB sector represented 9 per cent and 15 per cent of the entire financial system's assets and banking sector's assets, respectively. The systemic importance of the LSB sector is relatively low in comparison to the LCBs, both in terms of size and their impact on the financial system, as it does not play an intermediary role in the payment cycle. Components of the Financial System in sri lanka The financial system consists of the Central Bank, as the apex financial institution, other regulatory authorities, financial institutions, markets, instruments, a payment and settlement system, a legal framework and regulations. The financial system carries out the vital financial intermediation function of borrowing from surplus units and lending to deficit units. The legal framework and regulators are needed to monitor and regulate the financial system. The payment and settlement system is the mechanism through which transactions in the financial system are cleared and settled. The institutions being supervised are the systemically important institutions for financial stability. However, competition in the financial sector sometimes could make some financial institutions unviable, if they do not adapt themselves to the rapidly changing financial environment. Such institutions are either......

Words: 2650 - Pages: 11

Berkshire Case

...expense and amortization * Consider intangibles and cost of capital * Managers’ interest will be aligned with those of shareholders + Objectivity * A reasonable choice. Question 2: Evaluate the Berkshire Industries’ new incentive plan. What changes would you recommend, if any? Elements of the new incentive plan: 1. Target based on economic profit Managers were compensated directly for improving their entity’s economic profits. Economic profit = adjusted Net operating profit after taxes – (capital * cost of capital) pros | Cons | recommendations | Address suboptimization problemIt involves capitalization of advertising expense and amortizationManagers are motivated to invest in projects those internal rates of return higher than or at least equal to, the corporate cost of capital.  * | Still focuses on the past, while economic income reflects changes in future cash flow potentials => still likely to be a poor indicator of value changes for company.  Be affected by controllability problemsEx: the economic profit system was not applied to Spirits Division as it was not responsive to changing market conditions. Create understandability problems. measures can be complex and are not as widely familiar.Ex: a number of managers in Berkshire seemed not to understand how the economic profit measure was computed.Expensiverequire assistance from consultants , management development and training time. | More training courses for managersCombine with......

Words: 976 - Pages: 4

Payless Casestudy

...|payless casestudy | | Summary : The objective of writing the report is to address the issues that has been raised on 24th February,2015 in Payless , due to which company has been gone through various problems . The report states all the primary reasons for the occurrence of the issues and all the possible measures which can be taken in order to recover all the problems and stop the issues from happening again in the future . All the appropriate solutions will help the company from facing these issues again . Issues and causes: 1 Network Problem : On Monday at 9:30am organization was facing the problem of downtime of the network , no one in the organization was able to access the network . IDMS that were implemented last year are not working properly , due to which downtime in network was faced by all the people as they were not able to access the network which ends up in the result of high burden on the help desk as help desk is getting more and more calls of the frantic(panic) and angry users .As due to some extra burden on the ticketing system it got crashed and need to rebooted , as in result some of cases which needs assistance got blocked . Every user related to the Organization was going through same problem .CEO of the organization was also going through same situation , he was also not able to access the network and getting complaints of third party business partners that they are not able get connected as no network was available of payless foods....

Words: 1563 - Pages: 7

Casestudy

...priced products or service, whose quality is at par with A grade companies. Big players of Indian markets have been forced to lower their price bands to remain alive in the competition. Further, these big private Indian companies are offering mouth watering benefits in the form of gifts, rebates and even holding lucky draws to stay ahead in the race of ‘market supremacy’. Gone are the days when ‘brand loyalty, accounted for big customer base. Today, general Indian customers are trendy, flexible and are extremely flexible with their choice. Steady growth of private sector has sent a sense of urgency and insecurity amongst main market players. Defensive methods of protection of Brands against competitors are becoming popular. Legal instruments like patents, trademarks, industrial designs and copyrights filing has increased many fold and so is counter claim and litigation. Further, Mergers and Acquisitions, collaborations and licensing has become a popular amongst private Indian companies. The best thing that has happened to the overall Indian market with the growth of private sector is that it has helped to shed bureaucracy and lengthy official process and supplemented it by customer eccentric service, good work ethics, professionalism and transparency of accounts. 130 footer INDIAN BUSINESS ENVIRONMENT Some positive effect of the growth of private sector in India are as follows :– Ø Ø Ø Ø Ø Ø Ø Ø Ø Q. Manufacturing registered 11.9%......

Words: 21473 - Pages: 86

Berkshire Hathway

...Suggested Questions for Advance Assignment 1. What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement? Specifically, what does the $2.55 billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp? 2. Based on the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range? 3. Assess the bid for PacifiCorp. How does it compare with the firm’s intrinsic value? Perform a simple discounted cash-flow (DCF) analysis in Excel. 4. How well has Berkshire Hathaway performed? One way to measure this is to compare the stock market performance of BRK-A vs the S&P index. Do the following: as of a recent date compare the price of SPY(S&P ETF) vs BRK-A. Now use Yahoo finance historical prices (adjusted close) to compare compound annual return of each for the last 1,2,5,10, and 15 year periods. (Why did I pick adjusted close prices?) Comment on how BRK-A compared to benchmark. How well has it performed in the aggregate? What about its investment in MidAmerican Energy Holdings? 5. What is your assessment of Berkshire’s investments in Buffett’s Big Four: American Express, Coca-Cola, Gillette, and Wells Fargo? Calculate the compound annual return from purchase date through the date of the case, 2004. Now compare the compound annual return of each vs. SPY from 2004 to a recent...

Words: 364 - Pages: 2