Palm, Inc. was spun off from 3Com on March 2, 2000 and began trading on NASDAQ with the ticker symbol PALM.  Five percent of the shares were issued on this date plus it was well known that the remaining 95% would be split off on July 27, 2000.  That is, 3Com pre-announced that it would complete the distribution of its 532 million shares on July 27, 2000.  All 3Com shareholders who owned 3Com, ticker symbol COMS, at the close of market on July 27 would receive 1.483 shares of Palm for each share of 3Com.  

This means that the price of 3Com should be at least 1.483 time the price of Palm; in fact, you can calculate an implied value for 3Com from the price of Palm.  If, as happened on one day, Palm was trading at 95, then 3Com should be trading for at least 145.  But 3Com actually traded for 82 that day, which means that investors thought that the rest of 3Com (its implied value) was worth -$63.  The following chart shows how the stock prices and the implied value of the rest of 3Com changed over the period March 2, 2000 to July 27, 2000:

You can see that the implied value of 3Com was negative (a contradiction of limited liability) for over 1-month!  Although one cannot say for sure which stock is mispriced one can conclude for sure that both the market price of PALM and 3-Comm cannot equal their intrinsic values.  In other words, at least one or both are mispriced and from the subsequent price behavior it is pretty clear that PALM was overvalued at its inception as the final phase of the dot com bubble was winding down. 

In this chapter we start our development of intrinsic value models with the dividend model. As with many things, this turns out to have an interesting history, and in fact served as a stimulus for many other developments in finance and accounting.