The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next 5 years. Its latest EPS was $15, all of which was reinvested in the company. The firms expected ROE for the next 5 years is 22% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firms ROE on new investments is expected to fall to 17%, and the company is expected to start paying out 50% of its earnings in cash dividends, which it will continue to do forever after. DEQSs market capitalization rate is 24% per year.

a.	What is your estimate of DEQSs intrinsic value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Intrinsic value

$

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? The year after?

The price should (Click to select)fallrise by % per year until year 6: because there is (Click to select)dividendno dividend, the entire return must be in (Click to select)capital gainscapital losses.

c.	What effect would it have on your estimate of DEQSs intrinsic value if you expected DEQSto pay out only 22% of earnings starting in year 6?

The payout ratio would have (Click to select)effectno effect on intrinsic value because (Click to select)ROE = kROE < kROE > k.

rev: 09_04_2014_QC_48314, 11_18_2014_QC_58956