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

2. 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.

3. 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.

4. 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.

5. 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.

6. Recommendations for effective valuation  Support more intuitive valuation techniques with discounted cash flow analysis.  Remain aware of biases.