Based on forecasted information gathered by Value Line, they calculated GEICO's intrinsic value, defined as being the calculated sum of estimated cash flows into the future and discounted them back at GEICO cast of equity (Value Line). GEICO's intrinsic value ranges from $58.32 to $79.85 in which Berkshire offered a hefty price of $70.00 per share gaining 49.6% of GEICO previously not owned. Based on the range of the stock market price prior to the Berkshire acquisition, it can be confidently concluded that the price of GEICO share was undervalued.
Ironically, the price Mr. Buffet paid for GEICO at $70.00 still undervalues GEICO and the reason being can be explained by using Buffet's principles. To estimate intrinsic value, he uses the risk free rate rather than the cost of capital. Based on media and publications, Mr. Buffet is well known for avoiding risks. He relies on the concept of certainty when choosing his investments considering his business is almost all-equity. Based on this principle, computation of intrinsic value brings GEICO's intrinsic value from around $70.66 to $96.89. Note that the range exceeds the $70.00 Buffett paid for GEICO.