Question
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest EPS
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest EPS was $18.50, all of which was reinvested in the company. The firm's expected ROE for the next five years is 14% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firm's ROE on new investments is expected to fall to 9%, and the company is expected to start paying out 40% of its earnings in cash dividends, which it will continue to do forever after. DEQS's market capitalization rate is 25% per year.
a.What is your estimate of DEQS's intrinsic value per share?
b.Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year?
Price will rise by 25% per year until year 6. Because there is no dividend, the entire must return in capital gains.
Price in one year?
c.What do you expect to happen to price in the following year?
Price in two year?
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