Question

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 firm’s 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 firm’s 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. DEQS’s market capitalization rate is 24% per year.

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 DEQS’s 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	%

Answer 1