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 $15.50, 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 35% of its earnings in cash dividends, which it will continue to do forever after. DEQS's market capitalization rate is 22% 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.) Answer is complete and correct. $ Intrinsic value Price will 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.) 40.51 rise Price in one year Answer is complete and correct. 22✔% per year until year 6. ✓by Because there is no dividend , the entire return must be in capital gains ✔ Answer is complete and correct. $ 49.42

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 $15.50, 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 35% of its earnings in cash dividends, which it will continue
to do forever after. DEQS's market capitalization rate is 22% 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.)
✔Answer is complete and correct.
$
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
40.51✓
rise
Price in one year
Answer is complete and correct.
22✔% per year until year 6.
✓by
Because there is no dividend, the entire return must be in capital gains
✔ Answer is complete and correct.
$ 49.42
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 $15.50, 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 35% of its earnings in cash dividends, which it will continue to do forever after. DEQS's market capitalization rate is 22% 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.) ✔Answer is complete and correct. $ 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 40.51✓ rise Price in one year Answer is complete and correct. 22✔% per year until year 6. ✓by Because there is no dividend, the entire return must be in capital gains ✔ Answer is complete and correct. $ 49.42
c. What do you expect to happen to price in the following year? (Round your dollar value to 2 decimal places.)
✔Answer is complete and correct.
$ 60.30✔
Price in two years
d. What is your estimate of DEQS's intrinsic value per share if you expected DEQS to pay out only 15% of earnings starting in year 6?
(Do not round intermediate calculations. Round your answer to 2 decimal places.)
X Answer is complete but not entirely correct.
Intrinsic value
$ 15.50 X
Transcribed Image Text:c. What do you expect to happen to price in the following year? (Round your dollar value to 2 decimal places.) ✔Answer is complete and correct. $ 60.30✔ Price in two years d. What is your estimate of DEQS's intrinsic value per share if you expected DEQS to pay out only 15% of earnings starting in year 6? (Do not round intermediate calculations. Round your answer to 2 decimal places.) X Answer is complete but not entirely correct. Intrinsic value $ 15.50 X
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