Intrinsic value of Berkshire Hathaway Cl A - BRK-A

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$249,950

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$249,950

 
Intrinsic value

$498,929

 
Up/down potential

+100%

 
Rating

str. buy

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of BRK-A stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 407.9

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  6.00
  11.00
  10.40
  9.86
  9.37
  8.94
  8.54
  8.19
  7.87
  7.58
  7.32
  7.09
  6.88
  6.69
  6.53
  6.37
  6.24
  6.11
  6.00
  5.90
  5.81
  5.73
  5.66
  5.59
  5.53
  5.48
  5.43
  5.39
  5.35
  5.31
  5.28
Revenue, $m
  223,604
  248,200
  274,013
  301,031
  329,250
  358,673
  389,315
  421,194
  454,341
  488,793
  524,595
  561,799
  600,467
  640,666
  682,470
  725,962
  771,228
  818,364
  867,471
  918,656
  972,035
  1,027,727
  1,085,861
  1,146,570
  1,209,996
  1,276,286
  1,345,598
  1,418,095
  1,493,947
  1,573,335
  1,656,449
Variable operating expenses, $m
 
  206,125
  226,735
  248,308
  270,839
  294,332
  318,798
  344,252
  370,718
  398,227
  426,813
  448,570
  479,445
  511,541
  544,920
  579,646
  615,789
  653,424
  692,634
  733,503
  776,124
  820,591
  867,008
  915,481
  966,124
  1,019,054
  1,074,396
  1,132,281
  1,192,845
  1,256,233
  1,322,595
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  190,860
  206,125
  226,735
  248,308
  270,839
  294,332
  318,798
  344,252
  370,718
  398,227
  426,813
  448,570
  479,445
  511,541
  544,920
  579,646
  615,789
  653,424
  692,634
  733,503
  776,124
  820,591
  867,008
  915,481
  966,124
  1,019,054
  1,074,396
  1,132,281
  1,192,845
  1,256,233
  1,322,595
Operating income, $m
  32,744
  42,076
  47,278
  52,723
  58,411
  64,341
  70,517
  76,942
  83,623
  90,567
  97,782
  113,229
  121,023
  129,125
  137,550
  146,316
  155,439
  164,939
  174,837
  185,153
  195,911
  207,136
  218,853
  231,088
  243,872
  257,233
  271,202
  285,814
  301,102
  317,102
  333,853
EBITDA, $m
  41,645
  57,235
  63,188
  69,418
  75,926
  82,711
  89,777
  97,128
  104,772
  112,717
  120,972
  129,552
  138,469
  147,739
  157,379
  167,408
  177,846
  188,716
  200,040
  211,844
  224,153
  236,996
  250,401
  264,401
  279,027
  294,314
  310,297
  327,015
  344,507
  362,814
  381,980
Interest expense (income), $m
  3,732
  3,982
  5,467
  7,019
  8,642
  10,338
  12,106
  13,948
  15,864
  17,856
  19,926
  22,078
  24,313
  26,637
  29,053
  31,565
  34,179
  36,899
  39,732
  42,683
  45,759
  48,967
  52,314
  55,807
  59,456
  63,267
  67,251
  71,416
  75,773
  80,331
  85,102
Earnings before tax, $m
  33,667
  38,094
  41,811
  45,705
  49,769
  54,003
  58,410
  62,994
  67,759
  72,711
  77,856
  91,152
  96,709
  102,488
  108,497
  114,751
  121,260
  128,040
  135,105
  142,470
  150,152
  158,169
  166,539
  175,281
  184,416
  193,965
  203,951
  214,397
  225,329
  236,771
  248,751
Tax expense, $m
  9,240
  10,285
  11,289
  12,340
  13,438
  14,581
  15,771
  17,008
  18,295
  19,632
  21,021
  24,611
  26,112
  27,672
  29,294
  30,983
  32,740
  34,571
  36,478
  38,467
  40,541
  42,706
  44,966
  47,326
  49,792
  52,371
  55,067
  57,887
  60,839
  63,928
  67,163
Net income, $m
  24,074
  27,808
  30,522
  33,365
  36,331
  39,422
  42,640
  45,986
  49,464
  53,079
  56,835
  66,541
  70,598
  74,816
  79,203
  83,768
  88,520
  93,469
  98,627
  104,003
  109,611
  115,464
  121,574
  127,955
  134,624
  141,595
  148,884
  156,510
  164,490
  172,843
  181,588

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  86,370
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  620,854
  593,781
  655,534
  720,170
  787,679
  858,070
  931,375
  1,007,642
  1,086,941
  1,169,361
  1,255,012
  1,344,018
  1,436,525
  1,532,694
  1,632,704
  1,736,750
  1,845,042
  1,957,808
  2,075,289
  2,197,743
  2,325,443
  2,458,678
  2,597,753
  2,742,990
  2,894,726
  3,053,317
  3,219,134
  3,392,571
  3,574,036
  3,763,960
  3,962,796
Adjusted assets (=assets-cash), $m
  534,484
  593,781
  655,534
  720,170
  787,679
  858,070
  931,375
  1,007,642
  1,086,941
  1,169,361
  1,255,012
  1,344,018
  1,436,525
  1,532,694
  1,632,704
  1,736,750
  1,845,042
  1,957,808
  2,075,289
  2,197,743
  2,325,443
  2,458,678
  2,597,753
  2,742,990
  2,894,726
  3,053,317
  3,219,134
  3,392,571
  3,574,036
  3,763,960
  3,962,796
Revenue / Adjusted assets
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
  0.418
Average production assets, $m
  192,226
  213,452
  235,651
  258,887
  283,155
  308,459
  334,811
  362,227
  390,733
  420,362
  451,152
  483,148
  516,402
  550,973
  586,925
  624,327
  663,256
  703,793
  746,025
  790,045
  835,950
  883,846
  933,840
  986,050
  1,040,596
  1,097,606
  1,157,214
  1,219,561
  1,284,794
  1,353,068
  1,424,546
Working capital, $m
  0
  -93,572
  -103,303
  -113,489
  -124,127
  -135,220
  -146,772
  -158,790
  -171,287
  -184,275
  -197,772
  -211,798
  -226,376
  -241,531
  -257,291
  -273,687
  -290,753
  -308,523
  -327,036
  -346,333
  -366,457
  -387,453
  -409,370
  -432,257
  -456,168
  -481,160
  -507,291
  -534,622
  -563,218
  -593,147
  -624,481
Total debt, $m
  101,644
  136,685
  175,466
  216,058
  258,453
  302,659
  348,694
  396,590
  446,390
  498,150
  551,938
  607,834
  665,929
  726,323
  789,129
  854,470
  922,478
  993,294
  1,067,072
  1,143,973
  1,224,169
  1,307,841
  1,395,180
  1,486,389
  1,581,679
  1,681,274
  1,785,407
  1,894,325
  2,008,285
  2,127,558
  2,252,427
Total liabilities, $m
  337,853
  372,894
  411,675
  452,267
  494,662
  538,868
  584,903
  632,799
  682,599
  734,359
  788,147
  844,043
  902,138
  962,532
  1,025,338
  1,090,679
  1,158,687
  1,229,503
  1,303,281
  1,380,182
  1,460,378
  1,544,050
  1,631,389
  1,722,598
  1,817,888
  1,917,483
  2,021,616
  2,130,534
  2,244,494
  2,363,767
  2,488,636
Total equity, $m
  283,001
  220,887
  243,859
  267,903
  293,016
  319,202
  346,471
  374,843
  404,342
  435,002
  466,864
  499,975
  534,387
  570,162
  607,366
  646,071
  686,356
  728,305
  772,007
  817,560
  865,065
  914,628
  966,364
  1,020,392
  1,076,838
  1,135,834
  1,197,518
  1,262,036
  1,329,541
  1,400,193
  1,474,160
Total liabilities and equity, $m
  620,854
  593,781
  655,534
  720,170
  787,678
  858,070
  931,374
  1,007,642
  1,086,941
  1,169,361
  1,255,011
  1,344,018
  1,436,525
  1,532,694
  1,632,704
  1,736,750
  1,845,043
  1,957,808
  2,075,288
  2,197,742
  2,325,443
  2,458,678
  2,597,753
  2,742,990
  2,894,726
  3,053,317
  3,219,134
  3,392,570
  3,574,035
  3,763,960
  3,962,796
Debt-to-equity ratio
  0.359
  0.620
  0.720
  0.810
  0.880
  0.950
  1.010
  1.060
  1.100
  1.150
  1.180
  1.220
  1.250
  1.270
  1.300
  1.320
  1.340
  1.360
  1.380
  1.400
  1.420
  1.430
  1.440
  1.460
  1.470
  1.480
  1.490
  1.500
  1.510
  1.520
  1.530
Adjusted equity ratio
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372
  0.372

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  24,074
  27,808
  30,522
  33,365
  36,331
  39,422
  42,640
  45,986
  49,464
  53,079
  56,835
  66,541
  70,598
  74,816
  79,203
  83,768
  88,520
  93,469
  98,627
  104,003
  109,611
  115,464
  121,574
  127,955
  134,624
  141,595
  148,884
  156,510
  164,490
  172,843
  181,588
Depreciation, amort., depletion, $m
  8,901
  15,160
  15,910
  16,695
  17,515
  18,370
  19,260
  20,186
  21,149
  22,150
  23,190
  16,323
  17,446
  18,614
  19,829
  21,092
  22,407
  23,777
  25,204
  26,691
  28,242
  29,860
  31,549
  33,313
  35,155
  37,081
  39,095
  41,201
  43,405
  45,712
  48,127
Funds from operations, $m
  39,456
  42,968
  46,432
  50,059
  53,846
  57,792
  61,899
  66,172
  70,613
  75,229
  80,025
  82,863
  88,044
  93,430
  99,032
  104,860
  110,927
  117,246
  123,830
  130,694
  137,853
  145,323
  153,122
  161,268
  169,779
  178,676
  187,979
  197,711
  207,895
  218,554
  229,715
Change in working capital, $m
  6,921
  -9,273
  -9,731
  -10,186
  -10,638
  -11,093
  -11,552
  -12,019
  -12,496
  -12,988
  -13,497
  -14,026
  -14,578
  -15,155
  -15,760
  -16,396
  -17,065
  -17,770
  -18,513
  -19,297
  -20,124
  -20,996
  -21,916
  -22,887
  -23,911
  -24,992
  -26,131
  -27,331
  -28,596
  -29,929
  -31,334
Cash from operations, $m
  32,535
  80,356
  56,163
  60,245
  64,484
  68,884
  73,451
  78,190
  83,110
  88,217
  93,523
  96,890
  102,622
  108,585
  114,792
  121,256
  127,993
  135,016
  142,343
  149,991
  157,977
  166,319
  175,039
  184,155
  193,691
  203,668
  214,110
  225,043
  236,491
  248,484
  261,048
Maintenance CAPEX, $m
  0
  -6,494
  -7,211
  -7,961
  -8,746
  -9,566
  -10,421
  -11,311
  -12,237
  -13,200
  -14,201
  -15,242
  -16,323
  -17,446
  -18,614
  -19,829
  -21,092
  -22,407
  -23,777
  -25,204
  -26,691
  -28,242
  -29,860
  -31,549
  -33,313
  -35,155
  -37,081
  -39,095
  -41,201
  -43,405
  -45,712
New CAPEX, $m
  -12,954
  -21,227
  -22,199
  -23,235
  -24,268
  -25,304
  -26,351
  -27,416
  -28,506
  -29,629
  -30,790
  -31,996
  -33,254
  -34,571
  -35,952
  -37,402
  -38,929
  -40,537
  -42,232
  -44,020
  -45,906
  -47,895
  -49,995
  -52,210
  -54,546
  -57,010
  -59,608
  -62,347
  -65,233
  -68,274
  -71,477
Cash from investing activities, $m
  -84,267
  -27,721
  -29,410
  -31,196
  -33,014
  -34,870
  -36,772
  -38,727
  -40,743
  -42,829
  -44,991
  -47,238
  -49,577
  -52,017
  -54,566
  -57,231
  -60,021
  -62,944
  -66,009
  -69,224
  -72,597
  -76,137
  -79,855
  -83,759
  -87,859
  -92,165
  -96,689
  -101,442
  -106,434
  -111,679
  -117,189
Free cash flow, $m
  -51,732
  52,635
  26,753
  29,049
  31,470
  34,014
  36,679
  39,463
  42,366
  45,388
  48,532
  49,652
  53,045
  56,568
  60,226
  64,025
  67,972
  72,072
  76,335
  80,768
  85,380
  90,182
  95,184
  100,397
  105,832
  111,502
  117,421
  123,601
  130,057
  136,805
  143,859
Issuance/(repayment) of debt, $m
  12,679
  37,135
  38,781
  40,591
  42,395
  44,206
  46,035
  47,896
  49,800
  51,760
  53,788
  55,896
  58,094
  60,394
  62,806
  65,341
  68,008
  70,817
  73,778
  76,901
  80,196
  83,672
  87,339
  91,209
  95,290
  99,595
  104,133
  108,918
  113,960
  119,273
  124,869
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  12,791
  37,135
  38,781
  40,591
  42,395
  44,206
  46,035
  47,896
  49,800
  51,760
  53,788
  55,896
  58,094
  60,394
  62,806
  65,341
  68,008
  70,817
  73,778
  76,901
  80,196
  83,672
  87,339
  91,209
  95,290
  99,595
  104,133
  108,918
  113,960
  119,273
  124,869
Total cash flow (excl. dividends), $m
  -39,113
  89,770
  65,534
  69,640
  73,865
  78,220
  82,714
  87,359
  92,166
  97,148
  102,320
  105,548
  111,139
  116,962
  123,033
  129,366
  135,979
  142,889
  150,113
  157,669
  165,576
  173,854
  182,523
  191,605
  201,122
  211,097
  221,554
  232,519
  244,017
  256,077
  268,728
Retained Cash Flow (-), $m
  -27,451
  -22,162
  -22,972
  -24,044
  -25,113
  -26,186
  -27,269
  -28,371
  -29,499
  -30,660
  -31,862
  -33,110
  -34,413
  -35,775
  -37,204
  -38,705
  -40,285
  -41,949
  -43,703
  -45,553
  -47,504
  -49,564
  -51,736
  -54,028
  -56,446
  -58,996
  -61,684
  -64,518
  -67,505
  -70,652
  -73,967
Prev. year cash balance distribution, $m
 
  84,276
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  151,884
  42,562
  45,595
  48,752
  52,034
  55,445
  58,987
  62,666
  66,488
  70,458
  72,438
  76,727
  81,187
  85,829
  90,661
  95,694
  100,940
  106,410
  112,116
  118,071
  124,291
  130,787
  137,577
  144,676
  152,101
  159,870
  168,000
  176,512
  185,425
  194,761
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  145,623
  38,964
  39,680
  40,142
  40,333
  40,238
  39,851
  39,168
  38,194
  36,938
  34,400
  32,742
  30,869
  28,814
  26,617
  24,318
  21,963
  19,596
  17,263
  15,003
  12,856
  10,852
  9,017
  7,369
  5,917
  4,664
  3,606
  2,731
  2,024
  1,466
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Berkshire Hathaway Inc. operates as a holding company. It provides property and casualty insurance and reinsurance, as well as life, accident, and health reinsurance; and operates railroad systems in North America. The company also generates, transmits, and distributes electricity primarily from solar, wind, nuclear, geothermal, and hydro sources; operates natural gas distribution and storage facilities, interstate pipelines, and compressor and meter stations; and holds interest in coal mining assets. In addition, it offers real estate brokerage services; invests in fixed-income and equity instruments; and engages in manufactured housing and finance business, leasing of transportation equipment, and furniture leasing activities. Further, the company manufactures boxed chocolates and other confectionery products; specialty chemicals, metal cutting tools, and other products; flooring, insulation, roofing and engineered, building and engineered components, paints and coatings, and bricks and masonry products; recreational vehicles, apparel products, jewelry, and custom picture framing products; and alkaline batteries. Additionally, it manufactures structural investment castings and forged components, machined airframe components and engineered critical fasteners; airfoil castings; titanium and nickel superalloy melted and mill products; and seamless pipes, fittings, and forgings. The company distributes newspapers, televisions, and information; franchises and services quick service restaurants; distributes electronic components; and offers steel and logistics services, professional aviation training programs, and fractional aircraft ownership programs. In addition, it retails automobiles; furniture, bedding, and accessories; household appliances, electronics, and computers; jewelry, watches, crystal, china, stemware, flatware, gifts, and collectibles; kitchenware; and motorcycle accessories. The company was founded in 1889 and is headquartered in Omaha, Nebraska.

FINANCIAL RATIOS  of  Berkshire Hathaway Cl A (BRK-A)

Valuation Ratios
P/E Ratio 17.1
Price to Sales 1.8
Price to Book 1.5
Price to Tangible Book
Price to Cash Flow 12.7
Price to Free Cash Flow 21.1
Growth Rates
Sales Growth Rate 6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -19.5%
Cap. Spend. - 3 Yr. Gr. Rate 3.2%
Financial Strength
Quick Ratio 41
Current Ratio NaN
LT Debt to Equity 35.2%
Total Debt to Equity 35.9%
Interest Coverage 10
Management Effectiveness
Return On Assets 4.6%
Ret/ On Assets - 3 Yr. Avg. 4.6%
Return On Total Capital 6.6%
Ret/ On T. Cap. - 3 Yr. Avg. 6.8%
Return On Equity 8.9%
Return On Equity - 3 Yr. Avg. 9.1%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 24.4%
Gross Margin - 3 Yr. Avg. 24.4%
EBITDA Margin 20.7%
EBITDA Margin - 3 Yr. Avg. 20.8%
Operating Margin 14.6%
Oper. Margin - 3 Yr. Avg. 15.2%
Pre-Tax Margin 15.1%
Pre-Tax Margin - 3 Yr. Avg. 15.4%
Net Profit Margin 10.8%
Net Profit Margin - 3 Yr. Avg. 10.8%
Effective Tax Rate 27.4%
Eff/ Tax Rate - 3 Yr. Avg. 28.6%
Payout Ratio 0%

BRK-A stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the BRK-A stock intrinsic value calculation we used $223604 million for the last fiscal year's total revenue generated by Berkshire Hathaway Cl A. The default revenue input number comes from 2016 income statement of Berkshire Hathaway Cl A. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our BRK-A stock valuation model: a) initial revenue growth rate of 11% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for BRK-A is calculated based on our internal credit rating of Berkshire Hathaway Cl A, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Berkshire Hathaway Cl A.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of BRK-A stock the variable cost ratio is equal to 83.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for BRK-A stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4% for Berkshire Hathaway Cl A.

Corporate tax rate of 27% is the nominal tax rate for Berkshire Hathaway Cl A. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the BRK-A stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for BRK-A are equal to 86%.

Life of production assets of 29.6 years is the average useful life of capital assets used in Berkshire Hathaway Cl A operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for BRK-A is equal to -37.7%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $283001 million for Berkshire Hathaway Cl A - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 1.632 million for Berkshire Hathaway Cl A is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Berkshire Hathaway Cl A at the current share price and the inputted number of shares is $407.9 billion.


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Stock chart of BRK-A Financial statements of BRK-A
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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