Share Price vs. Fair Value

Below are the data sources, inputs and calculation used to determine the intrinsic value for Berkshire Hathaway.

NYSE:BRK.A Discounted Cash Flow Data SourcesData PointSourceValueValuation ModelExcess Returns ModelStable EPSMedian Return on Equity from the past 5 years. = Stable Book Value * Return on Equity = $477003.55 *15.0% $ 71667.88Book Value of Equity per ShareWeighted future Book Value estimates from 2 analysts.$ 477003.55Discount Rate (Cost of Equity)See below6.8%Perpetual Growth Rate5-Year Average of US Long-Term Govt Bond Rate2.5%

An important part of a discounted cash flow is the discount rate, below we explain how it has been calculated.

Calculation of Discount Rate/ Cost of Equity for NYSE:BRK.AData PointCalculation/ SourceResultRisk-Free Rate5-Year Average of US Long-Term Govt Bond Rate2.5%Equity Risk PremiumS&P Global4.1%Diversified Financial Unlevered BetaSimply Wall St/ S&P Global0.95Re-levered Beta= 0.33 + [(0.66 * Unlevered beta) * (1 + (1 - tax rate) (Debt/Market Equity))] = 0.33 + [(0.66 * 0.948) * (1 + (1 - 21.0%) (13.59%))]1.033Levered BetaLevered Beta limited to 0.8 to 2.0 (practical range for a stable firm)1.033Discount Rate/ Cost of Equity= Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium) = 2.50% + (1.033 * 4.12%)6.76%

Discounted Cash Flow Calculation for NYSE:BRK.A using Excess Returns Model

The calculations below outline how an intrinsic value for Berkshire Hathaway is arrived at using the Excess Return Model. This approach is used for finance firms where free cash flow is difficult to estimate.

In the Excess Return Model the value of a firm can be written as the sum of capital invested currently in the firm and the present value of excess returns that the firm expects to make in the future.

The model is sensitive to the Return on Equity of the company versus the Cost of Equity, how these are calculated is detailed below the main calculation.

Note the calculations below are per share.

See our documentation to learn about this calculation.

NYSE:BRK.A Value of Excess ReturnsCalculationResultExcess Returns= (Stable Return on equity – Cost of equity) x (Book Value of Equity per share) = (15.0% - 6.76%) x $477003.55$39439.23Terminal Value of Excess Returns= Excess Returns / (Cost of Equity - Expected Growth Rate) = $39439.23 / (6.76% - 2.50%)$926569.04Value of Equity= Book Value per share + Terminal Value of Excess Returns USD477003.55 + $926569.04$1403572.59

NYSE:BRK.A Discount to Share PriceCalculationResultValue per share (USD)From above.$1403572.59Current discountDiscount to share price of $641000 = ($1403572.59 - $641000) / $1403572.5954.3%

Learn more about our DCF calculations in Simply Wall St’s analysis model.

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Disclaimer

The user BenFranklin1776 holds no position in NYSE:BRK.A. Simply Wall St has no position in any of the companies mentioned. The author of this narrative is not affiliated with, nor authorised by Simply Wall St as a sub-authorised representative. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimates are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.