Three Potential Financial Benefits

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If the NPV equals to $142 million, assume to keep the other value constant, the growth rate of MEG’s newspaper will be -0.89593% (calculated by using trial and error, which is shown at Excel). If people desire the NPV to the amount of more than $142 million, the growth rate of MEG’s newspaper should be more than -0.89593%.

Question 3: The value of Buffett drives from the credit agreement is $70.5805

Buffett also signed a credit agreement with Media General. This agreement showed that Buffett would offer a $400 million term loan for 8 years. Thus, the future value of this loan is $400 million, and Buffett only offered $354 million cash due to the 11.5% discount to the face value. The difference between these two amount(FV and PV) is $400-$354=$46. The interest rate will be paid quarterly at 10.5% per annum, so the payment of this loan is Also, the market yield to maturity is 10.26% (corporate bond yields 10-year CCC+). If the interest will be paid quarterly, the quarterly rate will be , so the number of periods will be 8 years*4=32. The present value of this loan is [pic 29][pic 30]

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Therefore, the net present value (NPV) of this debt is $405.1962- $354=$51.1962, this amount is more than $46. In other words, the present value ($405.1962) is also more than the face value ($400) of this loan. These data also gives the evidence of which the yield to maturity (10.26%) is smaller than the rate of interest rate (10.5%). In addition, this amount also indicates that the company rating should be lower than the current grade(CCC+).

Furthermore, Berkshire will obtain penny warrants for $4.65 million which accounted in 19.9% of total shares outstanding. The formula to calculate the value of call option is

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These formulas can compute the value of call options. However, the value of σ was relatively high from 2009 to 2011, which is showed as 51.1%, 65.0%, 67%. This amount showed that if people use this formula to calculate the call options, a huge amount of errors may be computed (The Economic Times 2016). This amount will be not precise and reliable. Therefore, people cannot use this formula to calculate the value of call options when the amount of σ is large, they should change to another method to solve it.

After the announcement of acquisition, the stock price of Media General had a sharp increase at 33% to $4.18 per share. The case showed that the exercisable value of Media General within 8 years is $0.01 per share. This amount indicates that Berkshire can purchase these 4.65 million shares at $0.01 per share at any time in the future. In other words, Berkshire can gain ($4.18 - $0.01) * 4.65 million = $19.3905 million now.

Therefore, the total value of gain for Buffett is $19.3905+$51.1962=$70.5867 million

Word count: 396(exclude in-text references)

References:

Berkshire Hathaway (2013), Warren Buffett’s Letters to Berkshire Shareholders, 2012, p16-18

Berkshire Hathaway (2013), Annual & Interim Reports, 2012 Annual Report, p17-19

Media General (2012), Investor Relations, 2011 Annual Report, Full Book, p55-57

The Economic Times (2016), Definition of Black-Scholes Model, 2016, India.