valuation of palm, inc. case study: human factors and heuristics in palm, inc.’s valuation

Valuation of Palm, Inc.Case Study: Human Factors and Heuristics in Palm, Inc.’s Valuation

Could Palm be undervalued?

Fundamental value per share of $36.99 utilizing the traditional discounted cash flow approach.

The present value of growth opportunities (PVGO) method projects fundamental value per share of $-8.79.

Giving equal weight to both methods results in a projected value of $28.20.

This exceeds Palm’s market price per share of $21.69.

P/E Ratio

P/E Ratios Market P/E ratio:

145 Fundamental P/E

ratio: 72.5 Fundamental P/E

ratio using PVGO: -17.2

Meaning Lower

Fundamental P/E ratio than other methods.

Indicates market using lower ROE in calculations.

Palm, Inc v. the market Palm, Inc.’s self valuation suggests

undervalued stock. Is the market wrong in its valuation?

Palm used trailing P/E ratio instead of the appropriate forward P/E ratio.

Palm made questionable decision not to use PEG ratio, given anticipated growth.

Palm relied on valuation heuristics rather than discounted cash flow methods.

Human factors? Values used to calculate the P/E ratio &

price-to-sales ratios more readily available than those needed to use discounted cash flow techniques.

Excessive optimism in anticipated 26% ROE.

Achoring and adjustment possible contributor.

Recommendations for effective valuation Support more intuitive valuation

techniques with discounted cash flow analysis.

Remain aware of biases.