The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currentlyand is not expected to for the next 5 years. lts latest EPS was $10, all of which was reinvested inthe company. The firm's expected ROE for the next 5 years is 20% per year, and during this timeit is expected to continue to reinvest all of its earnings. Starting in year 6, the firm's ROE on newinvestments is expected to fall to 15%, and the company is expected to start paying out 40% ofits earnings in cash dividends, which it will continue to do forever after. DEQS's market capitalization rate is 15% per year. a. What is your estimate of DEQS's intrinsic value per share?

the answer is as follows:

As above when calculating the EPS for year 6 ,the answer is 29.86=10*1.2^6( the retention ratio is 1(according to the end of Y5),the growth rate for the period between the end of Y5 to the end of Y6 is 20%)

However ,as the speaking"Starting in year 6, the firm's ROE on newinvestments is expected to fall to 15%",as well as the retention ratio is 1(according to the end of Y5) ,so I think the growth rate for the period between the end of Y5 to the end of Y6 is 15%,and the EPS for year 6 is 28.62=10*1.2^5*1.15

But there is also another version for the EPS for year 6 is 27.12,which means the growth rate for the period between the end of Y5 to the end of Y6 is 9%,but the retention ratio is 0.6(according to the end of Y6),so the growth rate for the period between the end of Y5 to the end of Y6 is 9%=0.6*15%, the EPS for year 6 is 27.12=10*1.2^5*1.09

Which is collect?

Year 10 1 2 3 4 5 6 EPs 10.00112.00114.40117.28120.74/24.88729.86 b 1.00 1.00 1.00 1.00 1.00 1.00 0.60 D 0.00 0.00 0.00 0.00 0.00 0.00 11.94 g 20% 20% 20% 20% 20% 20% 9% Since current EPS in O period is $10 and no dividend is distributed leaving the EPS to grow at the rate of 20% till next 5 years. Thus, EPS for the 6th year is $29.86. Now dividend payout ratio in the 6th year is 40%, therefore, dividend for the 6th year is 40% of EPS that is: D = $29.86 x 0.4 = $11.94 As 40% of earning is to be distributed as dividend from 6th year onwards, Plowback ratio (b) is 0.6 (1-0.4). Therefore, growth rate from 6th year onwards is: g = ROExb = 15%x 0.6 = 9%