Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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 $16, all of which was reinvested in the company. The firms expected ROE for the next five years is 19% 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 14%, and the company is expected to start paying out 20% 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? (Omit the "%" sign in your response.)

The price should ______(Click to select rise fall) by _____ % per year until year 6: because there is _______ (Click to select no dividend dividend) , the entire return must be in ________(Click to select capital gains capital losses ) .

c. What do you expect to happen to price in the following year?

Price in the six year $

d. What effect would it have on your estimate of DEQSs intrinsic value if you expected DEQS to pay out only 19% of earnings starting in year 6? (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "$ and %" sign in your response.)

Time
Et $
Dt $
b $
g %

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

How To Understand Business Finance

Authors: Bob Cinnamon, Brian Helweg-Larsen

2nd Edition

0749460202, 978-0749460204

More Books

Students also viewed these Finance questions