The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected...

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The Digital Electronic Quotation System (DEQS) Corporation paysno cash dividends currently and is not expected to for the nextfive years. Its latest EPS was $13.00, all of which was reinvestedin the company. The firm’s expected ROE for the next five years is17% per year, and during this time it is expected to continue toreinvest all of its earnings. Starting in year 6, the firm’s ROE onnew investments is expected to fall to 12%, and the company isexpected to start paying out 35% of its earnings in cash dividends,which it will continue to do forever after. DEQS’s marketcapitalization rate is 20% per year. a. What is your estimate ofDEQS’s intrinsic value per share? (Do not round intermediatecalculations. Round your answer to 2 decimal places.) b. Assumingits current market price is equal to its intrinsic value, what doyou expect to happen to its price over the next year? (Round yourdollar value to 2 decimal places.) Because there is , the entirereturn must be in . c. What do you expect to happen to price in thefollowing year? (Round your dollar value to 2 decimal places.) d.What is your estimate of DEQS’s intrinsic value per share if youexpected DEQS to pay out only 15% of earnings starting in year6?

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4.0 Ratings (817 Votes)

a Current EPS E0 13 ROE for the next 5 years 17 this implies that the ROE between current time ie end of year 0 and end of year 5 is 17 Retention Ratio 1 as the firm retains all of its earnings for reinvesting in the business Growth Rate of Earnings for the next 5 years ROE over next 5 years x Retention Ratio over next 5 years 17 x 1 17 Earnings at the end of Year 5 E5 E0 x See Answer

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The Digital Electronic Quotation System (DEQS) Corporation paysno cash dividends currently and is not expected to for the nextfive years. Its latest EPS was $13.00, all of which was reinvestedin the company. The firm’s expected ROE for the next five years is17% per year, and during this time it is expected to continue toreinvest all of its earnings. Starting in year 6, the firm’s ROE onnew investments is expected to fall to 12%, and the company isexpected to start paying out 35% of its earnings in cash dividends,which it will continue to do forever after. DEQS’s marketcapitalization rate is 20% per year. a. What is your estimate ofDEQS’s intrinsic value per share? (Do not round intermediatecalculations. Round your answer to 2 decimal places.) b. Assumingits current market price is equal to its intrinsic value, what doyou expect to happen to its price over the next year? (Round yourdollar value to 2 decimal places.) Because there is , the entirereturn must be in . c. What do you expect to happen to price in thefollowing year? (Round your dollar value to 2 decimal places.) d.What is your estimate of DEQS’s intrinsic value per share if youexpected DEQS to pay out only 15% of earnings starting in year6?