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					Warren Buffet's 2-stage Model

                          CEO of Berkshire Hathaway Inc.              Omaha, Nebraska
                                       www.berkshirehathaway.com


                                       www.yahoo.com        BRK-A     BRK-B




Historical Facts:

June 1988, the price of CoCA Cola was $10. Over the next ten years, Buffet acquired 93.4 million s

At the end of 1989, CoCa-Cola represented 35percent of Berkshire's common stock portfolio.

The stock market's value of Coca-Cola in 1988 and 1989 avergaed $15 billion.

By 1992, the price became $45. Berkshire's $1 billion investment in 1988-1989 was worth $4 billion



                          Secret behind his Decision??
 Omaha, Nebraska




Buffet acquired 93.4 million shares.

ommon stock portfolio.




 88-1989 was worth $4 billion by 1992.
                                  Table A.21 The Coca-Cloa Company Discounted Owner Earnings
                                  Using a Two-Stage "Dividend" Discount Model (first stage is ten

                                  **Owner Earnings = NI + DEP - Capital Expenditures - WC


                                        1989
                                         1             2          3           4
Prior year owner earnings                    $828      $952      $1,095     $1,259
Growth rate (add)                              15%         15%     15%        15%
Owner earnings                                   952    1095       1259       1448
Discount factor (multiply)                   0.9174    0.8417    0.7722     0.7084
Discounted value per annum                       874       922        972     1026


Sum of present value of owner-earnings (1)                        11250 for the first 10 years


Residual value
   Owner earnings in year 10                            3350
   Growth Rate (g) (add)                                   5%
   Owner earnings in year 11                            3517
   Capitalization rate (k-g)                               4%
  Residual Value at end of year 10                     87930 (used Gordon model)
   Discount factor at end of year 10(multiply)         0.4224
Present Value of Residual (2)                                     37143
Intrinsic Value of Company (1) + (2)                              48393


Notes: Assumed firs-stage growth rate = 15%; assumed second-stage growth rate - 5%; k=discou
Dollar amounts are in millions
Discounted Owner Earnings
unt Model (first stage is ten years)

al Expenditures - WC


                Year
                5              6       7         8        9       10         11   12
             $1,448          $1,665   $1,915   $2,202   $2,533   $2,913 beyond
                 15%           15%      15%      15%      15%      15%
                1665           1915     2202     2533     2913     3350
              0.6499         0.5963   0.5470   0.5019   0.4604   0.4224
                1082           1142     1205     1271     1341     1415


for the first 10 years
                         k              0.09




don model)




growth rate - 5%; k=discount rate = 9%

				
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