he 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 $11.5, all of which was reinvested in the company. The firmâs expected ROE for the next 5 years is 20% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firmâs ROE on new investments is expected to fall to 15%, and the company is expected to start paying out 35% of its earnings in cash dividends, which it will continue to do forever after. DEQSâs market capitalization rate is 19% per year.
a. What is your estimate of DEQSâs 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)risefall by % per year until year 6: because there is (Click to select)dividendno dividend, the entire return must be in (Click to select)capital lossescapital gains.
| he 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 $11.5, all of which was reinvested in the company. The firmâs expected ROE for the next 5 years is 20% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firmâs ROE on new investments is expected to fall to 15%, and the company is expected to start paying out 35% of its earnings in cash dividends, which it will continue to do forever after. DEQSâs market capitalization rate is 19% per year. |
| a. | What is your estimate of DEQSâs 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)risefall by % per year until year 6: because there is (Click to select)dividendno dividend, the entire return must be in (Click to select)capital lossescapital gains. |
Related questions
| The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the next 4 years. Its latest EPS was $5.9, all of which was reinvested in the company. The firmâs expected ROE for the next 4 years is 16% per year, during which time it is expected to continue to reinvest all of its earnings. Starting in year 5, the firm will payout all of its earnings as dividend and the firmâs ROE on new investments is expected to fall to 11% per year. GGâs market capitalization rate is 15% per year. |
| a. | What is your estimate of GGâs intrinsic value per share? (Omit the "$" sign in your response. Round your answer to 2 decimal places.) |
