Warren Buffett Case Study

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (Eds.). (2011). Essentials of corporate finance (7th ed., Rev.). New York, NY: McGraw-Hill Irwin.

Second, financial managers use economic principles to guide them in making financial decisions that are in the best interest of the firm. In other words, finance is an applied area of economics that relies on accounting for input.

On a sideboard, one could list the major topic headings given in the case. The aim here should be to discuss the 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 development.

Discuss Buffett’s analysis of the junk bond failures of the 1980s.What is Buffett’s view of the role to be played by investment bankers?

One of the first most successful business mogul, Jonny Rockefeller achieved tremendous financial success. “The New Tycoons: John D. Rockefeller” He became one of America’s first billionaire. As a capitalist his goal was to make money. He envisioned himself as one of the richest person in America. Becoming a billionaire wasn’t something that was handed to him on a silver platter. “10 People Living the American Dream” Growing up he was one of six children. His mother raised him mostly single-handedly. He held various jobs to help support his family. Eventually his brother and him ventured in the oil business and monopolized the industry.

The sixth point that Mr. Buffett disagreed with is diversification. To be honest, I would like to divide investors into two groups, one is big and the other is small. For a small investor, diversification would undoubtedly cost so much that it is better to concentrate on one or two stocks. Nevertheless, it would be more terrific for a big investor to diversify not only because of reducing the firm-specific risk, but also the market risk by investing stocks with correlation not equal to one. Hence, this statement still remains some questions. Nevertheless, if we look the investments of Berkshire Hathaway, it does diversify its business in insurance, apparel, building products, finance and even flight

Yale’s investment philosophy is one of the critical factors that played into the success of the fund’s performance in the past years. The philosophy is based on 5 principles: focus on equity, diversification, opportunities in inefficient markets, outside managers and alignment of manager’s incentives with Yale’s interests. In the paragraphs below I will discuss how each of these principles is reflected in the endowment’s asset allocation, as shown from Exhibit 1.

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 strategy, each company is growing constantly and some of them such as GIECO and Nebraska Furniture Mart are the major layer in the industry.

At first, Mr. Warren E. Buffett said that their operating and capital-allocation process would not be affected by accounting numbers such as financial statement and any consolidated numbers. The book also says the accounting reality is restricted by the generally accepted accounting principles, GAAP, so that some intangible assets

It seems then that companies should fully leverage the company or a least come close to doing so but there is a probability that the company enters financial distress as its leverage (D/E) increases. Financial distress can be very costly for companies, and the cost for this scenario is shown in the current market value of the levered firm's securities. Investors factor the potential for future distress into their assessment of the present value (this is where PV of distress costs is subtracted from un-levered company value and the PV of the tax-shield.) The value for the costs

Operated through a complex, cryptic structure Bernie Madoff, CEO of Bernie L. Madoff Investment Securities (BMIS), perpetuated the most embellished Ponzi scheme the world has ever seen. The basis of the securities fraud that took place approximately between 1991 – 2008 was influenced by Bernie Madoff’s reliance upon an unqualified staff, outdated software, organizational seclusion, a personal halo effect, and weaknesses in the regulating body. Madoff had the confidence of the public, yet to pull off such an elaborate scheme, he relied on a startling number of family members, vital accomplices working on the illegal trading floor such as Frank D. Pascali, IT staff members, and a separate BMIS branch of international employees

REFERENCES•Ross, S.A., Westerfield, R.W., Jaffe, J., Jordan, B.D. "Modern Financial Management". McGraw-Hill, Eighth Edition, (2008)•R.A. Brealey and S.C. Myers, "Principles of Corporate Finance", McGraw-Hill, Seventh Edition, (2003).

From this set of problems, we can see that leverage is good for the firm. Leverage has increased the value of the firm as a whole and increased the price per share. Although the cost of debt increases the firm's risk because it increases the probability of default and bankruptcy, therefore shareholders will require higher rates of return on the equity they provide, debt also provides tax savings. And we can see that in table 4, where we calculated the total value of the firm as the pure business cash flows plus the tax savings. Another reason why debt increases firm value is the fact that it reduces WACC, because the cost of debt is generally lower than the cost of equity. Another option that shareholders can do is using homemade leverage. Shareholders should pay a premium for the shares of a levered firm when the addition of debt increases value.

Already in 1958, Modigliani and Miller have pointed the discussion of capital structure towards the cost of debt and equity. According to their first proposition, in a world of no corporate taxes and with perfect markets, financial leverage has no effect on a firm’s value. In their second proposition, they state that the cost of equity equals a linear function defined by the required return on assets and the cost of debt (Modigliani and Miller, 1958).

Nevertheless if companies operate in weak markets and fail to create growth and profit the concept of maximization of shareholder wealth is also an opportunity for self-regulation and security against threats for a company. This approach is in particular useful for safeguarding against difficulties arising from wrong or misguided leadership within a corporation. Shareholders of a company have the strongest interest in a company’s success because they often invest a lot of capital in the business and require revenues for their deposit (Moore, 2002). As a matter of fact, they become more