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MGMT 1A, Fall 2011 Prof.

Julie Ann Gardner-Treloar To complete the assignment, you need to refer to the Berkshire Hathaways financial statements for calendar year 2010 (for the year ended December 31, 2010). This assignment must be typed directly onto this document. You will need to access the information in two different locations:
1. Berkshire Hathaways web site 2. The SECs web site (www.sec.gov)

You must work on this assignment by yourself. IT IS NOT A GROUP PROJECT. Any students working together will receive zero on the assignment. Do not plagiarize. Use your own words. Every answer needs to be paraphrased or placed in quotations. Quotations should be limited. In answering the questions below, provide all dollar amounts in millions to be consistent with the financial statements. When computing percentages, carry all answers out to two decimal places (i.e., 12.34%). The following information can be obtained from Google and the Annual Report at the companys web site. I. Refer to Google 1. Who is Warren Buffet?

2. Where is Warren Buffet on the Forbes The 400 Richest Americans list, and what is the source of his wealth?

II.

Refer to the Berkshire Hathaway Chairmans Letter in the Annual Report

3. What is the overall book value growth of Berkshire Hathaway from 1965 to 2010? What is the overall growth in the S&P from 1965 to 2010? What is the compounded annual growth for Berkshire and for the S&P from 1965 to 2010?

4. How much did the per-share book value of both Class A and Class B stock change in 2010? 2

5. What acquisition was the highlight of 2010 for Berkshire? By how much does the acquisition increase Berkshires normal earnings power on a pre-tax and post-tax basis?

6. Who is Charlie?

7. What are the advantages of rail over trucking?

8. What is Warrens perspective on last years widespread pessimism about our economy? What is great about the American system?

9. What is Berkshires performance goal?

10. What is not synchronized with the earths movement around the sun? What does Warren mean?

11. What are the 3 components of Berkshires intrinsic value?

12. What job gets tougher as the numbers get larger?

13. What are Berkshires 3 advantages due to its size?

14. How does Warren manage his CEOs?

15. What is the value of the assets at world headquarters? Why?

16. Who is Ben Graham?

17. What is GEICO? Who is Davy and how did he meet Warren?

18. What did Berkshire pay for the 50% of GEICO it did not already own? What was the implied value for 100% of GEICO? What was GEICOs estimated goodwill? (show the calculation) Define goodwill.

19. What are the four major operating sectors of Berkshire?

20. What is Float? What was Berkshires float in 1970? What was Berkshires float in 2010?

21. Compare Berkshires underwriting gain/loss to State Farms underwriting gain/loss for the last 8 to 10 years.

22. What does Ajit do?

23. What test do most insurance companies flunk? Why do they flunk?

24. When Warren acquires a company, how far out ahead does he look?

25. What do TTI, Forest River, CTB, and H.H. Brown sell?

26. What was the problem at NetJets and how did Warren solve it?

27. How did Dave Sokol help NetJets? What else did David Sokol do in 2010 (refer to Audit 4

Committee Report at http://www.berkshirehathaway.com/dlsokol/dlsokol.html)

28. What were the combined pre-tax earnings of Johns Manville, MiTek, Shaw and Acme Brick in 2006 and in 2010? What caused the decline? What will help these companies perform better in the future? What is Berkshires horizon?

29. In what line of business are BNSF and MidAmerican Energy? What is a key characteristic of both BNSF and MidAmerican Energy?

30. What is MidAmerican accomplishing with respect to wind generation?

31. What government policy impairs the growth of the manufactured-home industry? What does Clayton do to mitigate this problem?

32. What were Warrens three best investments?

33. With respect to Berkshires investments in other publicly traded companies, what percentage of the following companies does Berkshire own? Calculate the percentage in value that each investment increased or decreased since Berkshires acquisition. American Express Coca-Cola Conoco Phillips Kraft Foods Proctor and Gamble Wells Fargo

34. What are the three large fixed-income investments made by Berkshire, which will likely be gone by year end? Why does Warren want to bless the Federal Reserve? 35. What saying of Aesop did Warren update and how did he update it? To what is Warren referring?

36. Which two of Berkshires investments are likely to increase their dividends and why? By what amount?

37. How old was Lou when he told Warren that he plans to retire? Why did that surprise Warren? How old are Warren and Charlie?

38. What was Lous job at Geiko?

39. What terrible behavior has the hedge-fund world witnessed? How does Warren expect to prevent this with respect to Todd Combs?

40. What is Berkshires only style box?

41. Why was the press puzzled about Todd? What metaphor did Warren use to describe his goal?

42. Why does Warren consider net income to be meaningless? If Warren and Charlie have a realized loss, would they sell an unrealized gain to offset it? Why or why not?

43. Does Warren believe in the theory of efficient markets?

44. What should students be learning how to value, instead of learning how to value options?

45. What is the problem with leverage?

46. What was the purpose of Ernests (Warrens grandfather) letter? What was included with the letter? Where was it found? 47. What can you shop for at the Annual shareholders meeting? 6

48. What appeals the most to you about the shareholder meeting?

49. What will Warren sell with a smile and a shoeshine?

50. What are Berkshires six criteria for a potential acquisition of a business? 51. How long does it take to obtain a response from Berkshire with respect to a business acquisition?

52. Who are the auditors of Berkshire Hathaway (see page 29)?

53. What was their opinion of the financial statements for 2010? III. Refer to the Consolidated Balance Sheets 54. Fill in the following blanks. Total Assets = As of 12/31/2010: As of 12/31/2009:

Total Liabilities +

Shareholders Equity

55. What is Berkshire Hathaways total contributed capital? Common Stock Capital in excess of par value As of 12/31/2010: As of 12/31/2009:

Total

56. What is the total dollar amount of earnings that Berkshire Hathaway has retained in the company since its inception? 7

As of 12/31/2010: As of 12/31/2009:

57. Compute the difference in the retained earnings amount that you recorded above. Compare this to the net income reported in fiscal 2010. What is the difference? a. Difference in retained earnings b. Net Earnings (Net Income) attributable to Berkshire in fiscal 2010 (from the Income Statement) c. Difference (a b)

58. Why (or why not) is there a difference (See Statement of Changes in Shareholder Equity)?

59. Refer to the Retained Earnings Column of the Consolidated Statement of Changes in Shareholders Equity. Does Berkshire Hathaway pay dividends? Why or why not? How does the Retained Earning column help to answer this question?

60. What amount is included in Berkshire Hathaways Property, Plant and Equipment for Railroad, Utilities and Energy at 12/31/10 per the Balance Sheet?

61. What types of assets are included in Property, Plant and Equipment for Railroad, Utilities and Energy (see Note 10 to Consolidated Financial Statements)?

62. What are the ranges of useful lives of Property, Plant and Equipment for Railroad, Utilities and Energy (see Note 10 to Consolidated Financial Statements)?

63. What are the definitions of depreciation and accumulated depreciation (refer to the glossary in your textbook)? How much accumulated depreciation is there for Property, Plant and Equipment for Railroad, Utilities and Energy for 2010 (See note 10 to Consolidated Financial Statements)?

64. On the Asset portion of the Balance Sheet, in the Insurance and Other section, what is the total amount of equity securities at 12/31/2010? Why does the total market value on pg 17 not 8

equal the Investments in Equity Securities on the Balance Sheet? (see note 4 to Consolidated Financial Statements)

65. Per the letter to the shareholders (pg 17), what are the 4 largest holdings (in market value) included in these equity securities?

66. What is the total amount of Unearned Revenue (unearned premiums) on the Balance Sheet with respect to the Insurance Business at 12/31/10?

IV. Refer to the Berkshire Hathaway Income Statement. (Note: Net earnings and net income refer to the same thing.) 67. Fill in the following blanks. For the year For the year ended 12/31/10 ended 12/31/09 Total Revenue Total Costs and Expenses Earnings before income tax and equity method earnings Net Earnings attributable to Berkshire Net Earnings per share attributable to Berkshire shareholders

For the year ended 12/31/08

68. Calculate the Revenue growth and growth in net income, filling in the blanks below. Fiscal 2010 vs. Fiscal 2009 Fiscal 2009 vs. Fiscal 2008 Revenue growth (as a %) Growth in net earnings attributable to Berkshire (as a %)

Calculate Berkshire Hathaways profit margin: For the year ending: 12/31/10 Profit margin

12/31/09

12/31/08

(Hint: The profit margin, or return on sales (ROS) is computed as Net Income/Net Sales.

69. The derivative gains/losses for 2008 is a significant loss. What is the amount of the loss and what accounting method requires this loss to be shown?

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V. Refer to Berkshire Hathaways Cash Flow Statement. 70. Fill in the following blanks. (a) (b) (c)

(d)

Net change in cash (SUM of columns a,b,c,d)

For the year ending:

Net Cash Flow from Operating Activities

Net Cash Flow from Investing Activities

Net Cash Flow from Financing Activities

Effect of foreign currency rate changes

12/31/10 12/31/09

71. Compute the change in the Cash and Cash Equivalents account (on the Balance Sheet), filling in the blanks below. 12/31/10 12/31/09 Difference Cash and cash equivalents
(Include cash for Insurance, Railroad and Finance)

How does the last column in your response to question 70 for 12/31/10 correspond to the difference that you just computed? Why?

72. How much cash did Berkshire Hathaway use for additions to property, plant and equipment? In fiscal year 2010 (ending 12/31/10) In fiscal year 2009 (ending 12/31/09)

73. What was the largest use of cash during the fiscal year ended 12/31/10? What was the 12

amount? What amount of cash was used to acquire BNSF (see note 2)?

VI. Notes to the Consolidated Financial Statements 74. Refer to Note #1 Summary of Significant Accounting Policies. List the business activities in which Berkshire Hathaway subsidiaries are engaged.

75. Refer to Note #1 regarding Summary of Significant Accounting Policies. What is included in cash equivalents?

76. Refer to Note #1 regarding Summary of Significant Accounting Policies. What does goodwill represent?

77. Refer to Note #1 regarding Summary of Significant Accounting Policies. How is insurance premium revenue recognized?

78. Refer to Note #2. What is Berkshires long-held acquisition strategy?

79. Refer to Note #2. How much did Berkshire pay for the portion of BNSF it did not already own? How did Berkshire fund the acquisition?

80. Refer to Note #7. What was the net amount of receivables of insurance and other businesses at 12/31/10? What was the amount of the allowances for uncollectible accounts at 12/31/10 for receivables of insurance and other businesses? Define allowance for uncollectible accounts (refer to textbook glossary).

81. Refer to Note #8. What are the components of inventory at 12/31/10? 13

82. Refer to Note #18. What was the ratio of the Class B Split approved on Jan 20, 2010? How many shares of Class B are now equal to one share of Class A common stock? 83. Refer to Managements Discussion and Analysis. How are Berkshires operating businesses managed?

84. Refer to Managements Discussion and Analysis. What does General RE sell? What is Reinsurance?

85. Refer to Managements Discussion and Analysis. What major events resulted in catastrophe losses for Berkshire Hathaway Reinsurance Group? What was the amount of the losses?

86. Refer to Managements Discussion and Analysis. What businesses are included in the retailing operations?

87. Refer to Owner-Related Business Principles #7. What financial calculus do Charlie and Warren employ? What does Warren believe should never be risked?

88. Refer to Owner-Related Business Principles #13. What is Warren Buffet unwilling to talk about? Who is Ben Graham and what are the names of his two most widely acclaimed books (refer to Wikipedia)? When were they written? For whom did Buffet work in 1954?

89. How many people does Berkshire employ and how many are at headquarters? What is Warrens succession plan? Why is Methuselahs record in jeopardy?

90. Refer to the list of Operating Companies on page 106. With which companies have you personally transacted business? (Note: there is no correct answer to this question)

91. On which stock exchange is Berkshire Hathaway traded? What are the trading symbols for Class A and Class B stock? 14

92. Information on Berkshire Hathaways recent stock price can be found at http:// finance.yahoo.com On the left-hand side of the page, in the blank that says Get Quote, type Berkshire Hathaways ticker. Record Berkshire Hathaways latest stock price for Class A $ as of (date): Record Berkshire Hathaways latest stock price for Class B $ as of (date): What is the ratio of Class B to Class A?
(See Note 18 of the annual report)

How many shares of stock does Berkshire Hathaway have outstanding? Refer to Note #18. What is the Berkshire Hathaway market cap. ?
(Market cap. refers to the market capitalization or the total market value of the company.)

Class A _____million shares Class B _____million shares $______ billion

Show how the market cap. was computed.

What is Berkshire Hathaways M/B ratio? (Market = market capitalization, book = book value or another name for Shareholders Equity) Note: Book Value is a company's shareholders equity as it appears on a balance sheet, which is equal to total assets minus liabilities (in its simplest form). This is how much the company would have left over in assets if it sold its assets and paid its liabilities. Since companies are usually expected to grow and generate more profits in the future, market capitalization is higher than book value for most companies. Since book value is a more accurate measure of valuation for companies which aren't growing quickly, book value is of more interest to value investors than growth investors. 93. What is the listed P/E ratio? _____ What is the meaning of the P/E ratio?

VII. Refer to the 10-K on the SECs website www.sec.gov to answer the following questions: 94. What are the first 8 Items titled in the 10K? Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. 15

Item 6. Item 7. Item 7A. Item 8.

95. Refer to the Item 1 in the 10-K. What is Standard and Poors rating of all of Berkshires major insurance subsidiaries?

96. Refer to the Item 1 in the 10K. What is TRIA and what is its purpose?

97. Refer to the Item 1A in the 10K. Berkshire is willing to take more risk than which other insurer?

98. Refer to the Item 1A in the 10K. Who makes the major investment decisions and the major capital allocation decisions? What are their positions?

99. Refer to the Item 7 in the 10K. Who is responsible for the day-to-day business activities of the operating businesses? What does Berkshires corporate office management do?

100. Compare the Income Statement and the Balance Sheet in the 10K to the Annual Report. Are there any differences?

101. How would you characterize the difference between the Annual Report and the 10-K?

102. Based on this assignment and your analysis, would you recommend purchasing Berkshire Hathaway stock (Class A or B)? Why or Why not? 16

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