In $2000$ the firm $3$Com spun out its personal digital assistant division as Palm Inc. On February $23,2001,$ the financial services firm Telerate reported the following information about Palm. The closing price for a share of Palm was $$21\mathrm{.}69.$ Palm had $565,946,000$ shares outstanding. Its book value of equity was $$1,110,640,000.$ It held $$742,888,000$ in cash. Its trailing P$/$E was $181.$ Palm was an all$-$equity financed firm and had no debt. During a presentation to investors, Palms then CFO Judy Bruner was asked two questions. $(1)$ What is Palms cost of capital? $(2)$ What is Palms return on equity likely to be over the next several years? Palms CFO responded by saying that she thought that the firms cost of equity was $16$ percent and that her best estimate for ROE was $26$ percent per year for the next six years. The length of the horizon during which the expected ROE exceeds the required return on equity is called the CAP $($an acronym for competitive advantage period$).$ Assume that Palms managers plan to maintain its dividend payout ratio at zero for six years, the length of the CAP. The CFO of Palm also remarked that in view of recent volatility in the price of Palm stock, her firm was trying to understand how the market values Palm, relative to the right factors to value Palm. Its current price of about $$22$ was below the offer price of $$38$ that prevailed when Palm had gone public a year earlier. Palms CFO indicated that she focused on trailing P$/$E and price$-$to$-$sales, noting that these may send conflicting signals. For example, she indicated that the market assigned Palm a high P$/$E ratio $(145$ at the time$)$ but, relative to other firms such as Handspring, a low price$-$to$-$sales ratio $(8$ at the time$).($In $2001,$ Handspring was a separate firm, which competed with Palm. Palm acquired Handspring in $2003.$ Subsequently, the firm split itself into two, becoming PalmOne and PalmSource.$)$ Case Analysis Questions $1.$ On the basis of the data presented in the case, use textbook techniques to estimate the fundamental value of Palm on February $23,2001.$ Clearly state all of your valuation assumptions, as you will have to make some assumptions. $2.$ Compare the ratio of the fundamental value per share that you computed in the previous question to Palms market price per share $($for February $23,2001).3.$ Compare Palms market P$/$E on February $23,2001,$ with the fundamental P$/$E you derive. $4.$ Analyze the approach that Palms CFO took in trying to ascertain whether or not Palm was fairly valued in February $2001.$