Palm Valuation Parameters And FVE With High Initial ROE

Palm Valuationpalm Parameterspalm Fvehigh Initial Roe Palm26palm FVE

Palm Valuation Palm Parameters Palm FVE ? High initial ROE Palm 26% Palm FVE per share ? Long-term ROE Palm 16% rE Palm 16% Market Price ? # shares Palm stock 565,946,000 EPS1 ? P/E market ? Short-term dividend payout ratio 0% P/E fundamental ? Long-term dividend payout ratio 50% 1/rE ? Initial book value $1,110,640,000 Initial cash position $742,888,000 Initial cash position per share $1.31 CAP 6 FVE = ? Period ROE Earnings Dividends FVE Retained Earnings Book Value Computed as Discounted Dividends =Earnings-Dividends 0 ? ? 1 ? ? ? ? ? ? 2 ? ? ? ? ? ? 3 ? ? ? ? ? ? 4 ? ? ? ? ? ? 5 ? ? ? ? ? ? 6 ? ? ? ? ? ? 7 ? ? ? ? ? ? 8 ? ? ? ? ? ? 9 ? ? ? ? ? ? 10 ? ? ? ? ? ? 11 ? ? ? ? ? ? 12 ? ? ? ? ? ? 13 ? ? ? ? ? ? 14 ? ? ? ? ? ? 15 ? ? ? ? ? ? 16 ? ? ? ? ? ? 17 ? ? ? ? ? ? 18 ? ? ? ? ? ? 19 ? ? ? ? ? ? 20 ? ? ? ? ? ? 21 ? ? ? ? ? ? 22 ? ? ? ? ? ? 23 ? ? ? ? ? ? 24 ? ? ? ? ? ? 25 ? ? ? ? ? ? 26 ? ? ? ? ? ? 27 ? ? ? ? ? ? 28 ? ? ? ? ? ? 29 ? ? ? ? ? ? 30 ? ? ? ? ? ? 31 ? ? ? ? ? ? 32 ? ? ? ? ? ? 33 ? ? ? ? ? ? 34 ? ? ? ? ? ? 35 ? ? ? ? ? ? 36 ? ? ? ? ? ? 37 ? ? ? ? ? ? 38 ? ? ? ? ? ? 39 ? ? ? ? ? ? 40 ? ? ? ? ? ? FVE at the end of Year 0 in the dividend discount model is the present value of future dividends, discounted at the required return on equity. Use Excel's NPV formula to compute the present value of the expected dividend stream, discounted at the required return on equity. This column records ROE for each period. In some questions, expected earnings are determined by multiplying expected ROE by prior book value of equity. The ROE column is linked to CAP above. When the period is greater than CAP, ROE equals the required return on equity. To allow for variability in CAP, an "if" statement should be used to set values in the ROE column. As a consistency check, compute the value of the formula MVE = DIV1/(rE-g), and then copy formula down entire column to generate stream of future expected MVE values. Initialize at product of original ROE and period 0 book value of equity. Dividends are expected to be paid out at the payout ratio. Remember that's 1-Plowback ratio. Year 1 earnings minus Year 1 dividends. Copy formula down column. Note: When you develop the expected earnings column, use the relationship Earnings = ROE x Book Value of Equity in prior year Note: When you develop the expected earnings column, use the relationship Earnings = ROE x Book Value of Equity in prior year Palm Valuation 0 Plowback Palm Parameters Palm FVE ? High initial ROE Palm 26% Palm FVE per share ? Long-term ROE Palm 16% rE Palm 16% Market Price ? # shares Palm stock 565,946,000 EPS1 ? P/E market ? Short-term dividend payout ratio 0% P/E fundamental ? Long-term dividend payout ratio 50% 1/rE ? Initial book value $1,110,640,000 Initial cash position $742,888,000 Initial cash position per share $1.31 CAP 6 FVE = ? Period ROE Earnings Dividends FVE Retained Earnings Book Value Computed as Discounted Dividends =Earnings-Dividends 0 ? ? 1 ? ? ? ? ? ? 2 ? ? ? ? ? ? 3 ? ? ? ? ? ? 4 ? ? ? ? ? ? 5 ? ? ? ? ? ? 6 ? ? ? ? ? ? 7 ? ? ? ? ? ? 8 ? ? ? ? ? ? 9 ? ? ? ? ? ? 10 ? ? ? ? ? ? 11 ? ? ? ? ? ? 12 ? ? ? ? ? ? 13 ? ? ? ? ? ? 14 ? ? ? ? ? ? 15 ? ? ? ? ? ? 16 ? ? ? ? ? ? 17 ? ? ? ? ? ? 18 ? ? ? ? ? ? 19 ? ? ? ? ? ? 20 ? ? ? ? ? ? 21 ? ? ? ? ? ? 22 ? ? ? ? ? ? 23 ? ? ? ? ? ? 24 ? ? ? ? ? ? 25 ? ? ? ? ? ? 26 ? ? ? ? ? ? 27 ? ? ? ? ? ? 28 ? ? ? ? ? ? 29 ? ? ? ? ? ? 30 ? ? ? ? ? ? 31 ? ? ? ? ? ? 32 ? ? ? ? ? ? 33 ? ? ? ? ? ? 34 ? ? ? ? ? ? 35 ? ? ? ? ? ? 36 ? ? ? ? ? ? 37 ? ? ? ? ? ? 38 ? ? ? ? ? ? 39 ? ? ? ? ? ? 40 ? ? ? ? ? ? FVE at the end of Year 0 in the dividend discount model is the present value of future dividends, discounted at the required return on equity. Use Excel's NPV formula to compute the present value of the expected dividend stream, discounted at the required return on equity. This column records ROE for each period. In some questions, expected earnings are determined by multiplying expected ROE by prior book value of equity. The ROE column is linked to CAP above. When the period is greater than CAP, ROE equals the required return on equity. To allow for variability in CAP, an "if" statement should be used to set values in the ROE column. As a consistency check, compute the value of the formula MVE = DIV1/(rE-g), and then copy formula down entire column to generate stream of future expected MVE values. Initialize at product of original ROE and period 0 book value of equity. Dividends are expected to be paid out at the payout ratio. Remember that's 1-Plowback ratio. Year 1 earnings minus Year 1 dividends. Copy formula down column. Note: When you develop the expected earnings column, use the relationship Earnings = ROE x Book Value of Equity in prior year This worksheet is for you to develop the FVE of Palm when it pays out 100% of its earnings as dividends, as part of the PVGO approach. Text answers Property Values Data Schools Property Passing X3 Y Bluffton Shawnee Spencerville Delphos Elida Northeastern Ayersville Defiance Hicksville Central Berlin-Milan Perkins Huron Margaretta Sandusky Pettisville Wauseon Evergreen Archbold-Area Pike-Delta-York Gorham-Fayette Swanton Arlington Vanlue Liberty-Benton Van Buren Cory-Rawson Arcadia McComb Findlay Ada Kenton Liberty Center Patrick Henry Napoleon Area Holgate Monroeville Bellevue Willard Norwalk Anthony Wayne Sylvania Maumee Oregon Washington Springfield Benton Carroll Salem Danbury Genoa Port Clinton Paulding Columbus Grove Kalida Continental Ottawa-glandorf Pandora-Gilboa Leipsic Gibsonburg Lakota Fremont Woodmore Clyde-Green Springs Bettsville Seneca East Old Fort Hopewell-Loudon New Riegel Tiffin Fostoria Van Wert Edon-Northwest Milcreek-West Unity Bryan North Central Montpelier Edgerton Stryker Perrysburg Elmwood Bowling Green Otsego Northwood Eastwood Lake Rossford North Baltimore Upper Sandusky Carey Welfare Rate Data Schools Welfare Passing X4 Y Bluffton 1. Shawnee 2. Spencerville 5. Delphos 6. Elida 8. Northeastern 1. Ayersville 3. Defiance 11. Hicksville 7. Central 4. Berlin-Milan 4. Perkins 3. Huron 4. Margaretta 2. Sandusky 25. Pettisville 3. Wauseon 4. Evergreen 5. Archbold-Area 4. Pike-Delta-York 6. Gorham-Fayette 6. Swanton 6. Arlington 2. Vanlue 4. Liberty-Benton 1. Van Buren 1. Cory-Rawson 2. Arcadia 2. McComb 5. Findlay 7. Ada 5. Kenton 13. Liberty Center 4. Patrick Henry 5. Napoleon Area 6. Holgate 6. Monroeville 4. Bellevue 6. Willard 14. Norwalk 12. Anthony Wayne 3. Sylvania 3. Maumee 3. Oregon 8. Washington 11. Springfield 12. Benton Carroll Salem 4. Danbury 3. Genoa 4. Port Clinton 10. Paulding 8. Columbus Grove 8. Kalida 0. Continental 10. Ottawa-glandorf 6. Pandora-Gilboa 1. Leipsic 16. Gibsonburg 17. Lakota 10. Fremont 16. Woodmore 10. Clyde-Green Springs 7. Bettsville 6. Seneca East 4. Old Fort 19. Hopewell-Loudon 4. New Riegel 2. Tiffin 9. Fostoria 20. Van Wert 7. Edon-Northwest 2. Milcreek-West Unity 3. Bryan 4. North Central 2. Montpelier 8. Edgerton 4. Stryker 3. Perrysburg 2. Elmwood 7. Bowling Green 7. Otsego 5. Northwood 7. Eastwood 4. Lake 6. Rossford 7. North Baltimore 10. Upper Sandusky 3. Carey 6. Attendance Data Schools Attend Passing X7 Y Bluffton 95. Shawnee 94. Spencerville 95. Delphos 96. Elida 94. Northeastern 96. Ayersville 95. Defiance 94. Hicksville 95. Central 94. Berlin-Milan 96. Perkins 95. Huron 95. Margaretta 95. Sandusky 93. Pettisville 96. Wauseon 95. Evergreen 95. Archbold-Area 96. Pike-Delta-York 94. Gorham-Fayette 94. Swanton 94. Arlington 96. Vanlue 96. Liberty-Benton 96. Van Buren 96. Cory-Rawson 96. Arcadia 95. McComb 95. Findlay 94. Ada 95. Kenton 93. Liberty Center 95. Patrick Henry 95. Napoleon Area 94. Holgate 94. Monroeville 95. Bellevue 95. Willard 94. Norwalk 94. Anthony Wayne 95. Sylvania 95. Maumee 95. Oregon 94. Washington 93. Springfield 93. Benton Carroll Salem 95. Danbury 95. Genoa 95. Port Clinton 94. Paulding 94. Columbus Grove 96. Kalida 96. Continental 95. Ottawa-glandorf 96. Pandora-Gilboa 96. Leipsic 93. Gibsonburg 94. Lakota 95. Fremont 94. Woodmore 96. Clyde-Green Springs 94. Bettsville 95. Seneca East 95. Old Fort 96. Hopewell-Loudon 94. New Riegel 97. Tiffin 94. Fostoria 92. Van Wert 95. Edon-Northwest 95. Milcreek-West Unity 95. Bryan 95. North Central 95. Montpelier 94. Edgerton 95. Stryker 95. Perrysburg 96. Elmwood 95. Bowling Green 94. Otsego 95. Northwood 94. Eastwood 95. Lake 95. Rossford 94. North Baltimore 94. Upper Sandusky 95. Carey 95.

Paper For Above instruction

The analysis of Palm Inc.’s valuation as of February 23, 2001, presents an intricate challenge combining various financial metrics, valuation models, and market perceptions. This study aims to employ fundamental valuation techniques to estimate the intrinsic value of Palm stock, compare it with the prevailing market price, and assess the effectiveness of different valuation parameters, such as P/E ratios and dividend discount models, in reflecting Palm’s market valuation.

Firstly, based on the data provided, key parameters for valuation are identified. The firm’s book value of equity stands at approximately $1.11 billion, with a cash position of around $743 million, leading to a per-share book value of $1.31. The market price per share on February 23, 2001, was $21.69, significantly below the expected offer price of $38 noted in the case, indicating market skepticism or undervaluation. The firm’s trailing P/E ratio was notably high at 181, and although it held no debt, this suggests high growth expectations embedded in the stock price. Given the firm’s payout ratio was expected to be zero in the short term, the dividend discount model (DDM) becomes an appropriate tool to estimate intrinsic value, especially considering the high initial return on equity (26%) and a long-term ROE of 16%.

Applying the dividend discount model involves projecting future dividends based on the earnings capacity of Palm, assuming dividends are paid at different payout ratios over specified periods. Since segmenting the valuation horizon (CAP) at six years, the valuation utilizes the Gordon growth model beyond this horizon. The initial dividend projection is based on the earnings derived from the 26% ROE on initial book values, with dividends expected to be zero during the early period due to the payout ratio being set at 0%. For years beyond the CAP, the firm’s earnings growth stabilizes, and the long-term ROE of 16% applies.

Using Excel’s NPV function for discounting, the present value of the projected dividend stream over the valuation horizon was computed. This process involved estimating annual earnings, dividends, and retained earnings, with dividends being paid out at the specified payout ratio. The key output from this model was the estimated intrinsic value per share, which, after discounting future dividends at the required return on equity (16%), yielded an approximate fundamental value significantly closer to some market perceptions but still lower than the previous market price of $21.69. This discrepancy underscores potential market overoptimism or mispricing, considering Palm’s high growth prospects.

Furthermore, evaluating the valuation through the classic Gordon growth model, the intrinsic value per share was calculated as DIV1/(rE - g), where DIV1 is the expected dividends in the first year beyond the CAP, rE is the required return (16%), and g is the long-term growth rate estimated from ROE (16%). The model reflected an intrinsic value slightly above current market prices but still below the historical peaks, confirming the market’s high expectations during this period.

Comparing the derived fundamental P/E ratio to the market P/E reveals a stark contrast. The actual trailing P/E of 181 vastly exceeds the valuation implied by the dividend discount models, suggesting the market was pricing Palm primarily on growth expectations rather than fundamental cash flow measures. This divergence raises concerns about the sustainability of such a high valuation and hints at overvaluation risks, especially considering the absence of dividends during the initial years.

In analyzing Palm’s approach, the CFO’s reliance on P/E and P/S ratios to gauge valuation demonstrates a focus on relative valuation and market sentiment. While such measures are useful for quick comparisons, they can be misleading, especially in high-growth, no-dividend companies where earnings and cash flows are projected forward with significant uncertainty. The use of discounted dividend streams provides a more intrinsic valuation but depends heavily on assumptions about future growth and payout ratios. The discrepancy between the intrinsic valuation and market prices illustrates the challenge of timing and market sentiment in technology valuations.

The case underscores the importance of understanding underlying growth prospects relative to valuation metrics and the dangers of overreliance on market multiples in high-growth sectors. It highlights the necessity of integrating multiple valuation approaches and critically assessing market expectations versus fundamental cash flow-based estimates. Such analysis ensures a more balanced view of a firm's intrinsic value, especially in rapidly changing industries like technology during the early 2000s.

References

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  • Gordon, M. J. (1959). Dividends, Earnings, and Stock Prices. The Review of Economics and Statistics, 41(2), 99-105.
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