EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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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 $18.00, all of which was reinvested in the company. The firm's expected ROE for the next five years is 16% 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 11%, 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 24% per year.
Required:
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?
c. What do you expect to happen to price in the following year?
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?
Complete this question by entering your answers in the tabs below.
Required A
Required B Required C Required D
What do you expect to happen to price in the following year?
Note: Do not round intermediate calculations. Round your dollar value to 2 decimal places.
Price in two years
$
40.51 X
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