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 $11.00, all of which was reinvested in the company. The firm's expected ROE for the next five years is 15% 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 14%, and the company is expected to start paying out 30% of its 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 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? (Round your dollar value to 2 decimal places.) Price will by % per year until year 6.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 18P
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100%
Because there is no dividend
Price in one year
Price in two years
"
c. What do you expect to happen to price in the following year? (Round your dollar value to 2 decimal places.)
the entire return must be in capital gains
Intrinsic value
d. What is your estimate of DEQS's intrinsic value per share if you expected DEQS to pay out only 10% of earnings starting in year 6?
(Do not round intermediate calculations. Round your answer to 2 decimal places.)
Transcribed Image Text:Because there is no dividend Price in one year Price in two years " c. What do you expect to happen to price in the following year? (Round your dollar value to 2 decimal places.) the entire return must be in capital gains Intrinsic value d. What is your estimate of DEQS's intrinsic value per share if you expected DEQS to pay out only 10% of earnings starting in year 6? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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 $11.00, all of which was reinvested in the company. The firm's expected ROE for the next five years is 15% 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 14%, and the company is expected to start paying out 30% of its 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? (Do not round intermediate calculations. Round your answer to 2
decimal places.)
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? (Round
your dollar value to 2 decimal places.)
Price will
by
% per year until year 6.
Transcribed Image Text: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 $11.00, all of which was reinvested in the company. The firm's expected ROE for the next five years is 15% 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 14%, and the company is expected to start paying out 30% of its 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 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? (Round your dollar value to 2 decimal places.) Price will by % per year until year 6.
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