The DEQS Corporation pays no cash dividends currently, and is not expected to pay any...
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The DEQS Corporation pays no cash dividends currently, and is not expected to pay any dividend for the next five years. Its latest earnings per share was $10, all of which is reinvested in the firm. DEQS has an expected return on equity (ROE) for the next five years of 20%, and during this time it expects to continue to reinvest all earnings in the firm. Starting in year 6, the firms ROE on new investments is expected to fall to 15%, and the company expects to start paying out 40% of earnings as dividends, which it will continue to do forever after. DEQSs market capitulation rate -- its required rate of return is 15% per year.
a. What is your estimate of DEQSs intrinsic value per share? Show your work!
b. If the market value of DEQS equals its intrinsic value, what do you expect to happen to the price per share of DEQS over the next year?
c. How would your answer change if, in year five, DEQS started paying out 20% of earnings in dividends, and continued paying 20% forever?
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