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1. What is the meaning of the change in stock price of Berkshire Hathaway on the day of the announcement? Or, what does the $718 million gain in Berkshire Hathaway’s market value means for intrinsic value of GEICO?

Before the announcement, Berkshire Hathaway owned 50.4% of GEICO (34.25 million of shares). As mentioned in the case, GEICO had 67,889,574 shares outstanding. Consequently, it is possible to calculate the number of shares acquired:

67,889,574 – 34,250,000 = 33,639,574 shares

The share price before the announcement was $55.75 and Warren Buffett offered $70.00 per share to buy the 49.6% of GEICO that it did not already owned. Given these figures, we would assume that the $718 million gain in market value stemmed from the difference between $70.00 and $55.75 multiplied by the number of shares previously owned (34,250,000 shares).

34,250,000 * (70.00 – 55.75) = $488,062,500

According to the Efficient Markets Hypothesis; stock prices accurately reflect available information and respond rapidly to new information as soon as it becomes available. In our case, if the market was perfectly efficient, the gain would be $488,062,500. In other words, there would be no difference between the price offered by Buffett and the market price. Obviously, we are far from the gain in market value of $718 million. This difference may be due to an overreaction of the market after the announcement. We may think that the market reacted positively after the annoucement because of the long history of successful investments realized by Berkshire Hathaway.
Using Excel, we find that $73.39 is the price which allows us to obtain a market gain of $718 million.

34,250,000 * (73.39 – 55.75) = $604,064,986
33,639,574 * (73.39 -70.00) = $113,935,014

Adding the gain in market value from the already owned shares and the one from the newly obtained shares, we find a total...