Warren Buffet’s Investment in Bank of America Harvard Case Solution & Analysis

Warren Buffet’s Investment in Bank of America Case Solution

Performance of Bank of America after the Investment:

At the low point of Bank of America‘s post financial crisis, Warren Buffet invested $5 billion of Berkshire Hathaway’s money in the Bank of America which was the 2nd biggest bank in the United States based on assets. The deal consisted of Berkshire Hathaway receiving $5 billion worth of preferred stock yielding 6% a year plus warrants to purchase 700 million shares of Bank of America’s common stock at an exercise price a $7.14 per share.
The stock performance of the Bank of America over the last four years has a mixed trend.Moreover, the share price of the company at the end of year 2008 was $14.08 which exceeded in the year 2009 by $15.06; however the dividend paid to the shareholders decreased from $2.26 per share to $0.04, which shows a decline of 98% in the dividend paid to the shareholders. The price of the share in 2010 was $13.34, which was even less than the share price of 2008 after the financial crisis. The share price of the Bank of America decreased in the year 2011 to $5.56,which shows a decrease of almost 58% though the price recovered to $11.36 in the fourth year, which is 19% less when Warren Buffet made the investment in the Bank of America. The dividend of the company however, stayed constant at $0.04 annually.
The Bank of America’s performance over the four years after the financial crisis as compared to Goldman Sachs and Citi Bank is not correlating. The Citi Bank’s stock performance has improved significantly in the year 2011 when the share price increased up to 456% from $4.73 to $26.31. The dividend paid by the Citi Bank is also more than the dividend paid out by the Bank of America. The dividend per year paid by the Citi Bank is $0.12 per year as compared to the $0.04 of Bank of America. The performance of the Goldman over the four years also has a mix trend as shown in the exhibit. The share price has decreased from $170 in 2008 to $115 in the time period of four years. Moreover, the trend in the dividend paid by Goldman Sachs also has a mixed trend with little variation in the four year period. The stock performance of all three institutions has the mixed trends,however;mostly the trend in share price is downwards. (Yahoo Finance- BAC)(Yahoo Finance- GS)(Yahoo Finance- Citi group)

Assessment of the Investment:

Bank of America announced in August that it had entered into a Securities Purchase Agreement dated August with Berkshire Hathaway Inc. In addition to this, Berkshire Hathaway acquired 50000 shares of the new series of the preferred stock of Bank of America with the 6% perpetual preferred stock having the liquidation value of $100,000 per share a warrant to purchase 700,000,000 shares of the Bank of America for an aggregate purchase price of $5.0 billion in cash.
The dividends on the Preferred stock will accrue on the liquidation value at the rate of 6% but will only be paid only as and if declared by the Bank of America Board of Directors out of the fund, which is legally available. The preferred stock can be redeemed by the Bank of America any time at a redemption price of $105000 per share plus any accrued, unpaid dividends................

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