Essay on Palm Inc Analysis
Palm Inc. is a division of 3Com. Because of stock price volatility, the CFO is looking into better understanding how Palm is valued in the market. Managers/CFOs often use heuristics for valuation purposes as opposed to traditional methods such as the DCF. Metrics such as the ones used by Palm's CFO, the P/E and price-to-sales, are often easier to use and require less research and fewer variables. However, relying on such metrics can lead to the affect heuristic. DCF is the methodology that should be used to ensure the fundamental value is accurate. The application of heuristics in valuation is often subject to bias. The bias can stem from incorrect assumptions made in regards to inputs for …show more content…
P/E Ratio Heuristic Analysis
The P/E ratio heuristic provides us with a valuation of $73.95 (145*$0.51). This tells us that one year hence the market expected the stock to increase, however due to the true intrinsic value calculated using the DDM(FCF), the original assumptions were incorrect. The fundamental PE ratio using PVGO was 17.2, which signify that the Fundamental PE ratio was lower than any other methods and indicate that the market was using a lower ROE in calculations. These conclusions indicate that Palm’s self-valuation suggested an undervalued stock. The CFO’s decision to use a trailing PE ratio instead of the appropriate forward PE ratio and not to use PEG ratio even though with a given anticipated growth contributed to the undervaluation of its stocks.