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.
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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
100%
![### Financial Analysis of DEQS: Projected Prices and Intrinsic Value
**Because there is no dividend, the entire return must be in capital gains.**
**Price in one year:** [Input Box]
---
**c. What do you expect to happen to price in the following year?**
*(Round your dollar value to 2 decimal places.)*
**Price in two years:** [Input Box]
---
**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.)*
**Intrinsic value:** [Input Box]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff1fd60a6-e122-44a6-b63f-53f11d7f8fb8%2Ffe72ca19-bc29-4b4d-82a8-954c585f6587%2F192xexf_processed.png&w=3840&q=75)
Transcribed Image Text:### Financial Analysis of DEQS: Projected Prices and Intrinsic Value
**Because there is no dividend, the entire return must be in capital gains.**
**Price in one year:** [Input Box]
---
**c. What do you expect to happen to price in the following year?**
*(Round your dollar value to 2 decimal places.)*
**Price in two years:** [Input Box]
---
**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.)*
**Intrinsic value:** [Input Box]
![### Valuing DEQS Corporation: An Educational Guide
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest Earnings Per Share (EPS) was $11.00, all of which was reinvested in the company. The firm’s expected Return on Equity (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.
---
#### Calculations:
**a. Estimating DEQS’s Intrinsic Value Per Share:**
- **Question:** 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** [Input Your Answer Here]
**b. Price Expectation Over the Next Year:**
- **Question:** 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** [Increase/Decrease] **by** [Input Your Dollar Value Here] **% per year until year 6.**
---
#### Explanation of Graphs and Diagrams:
No specific graphs or diagrams are provided in this content. However, understanding how to calculate intrinsic value involves using the Dividend Discount Model (DDM) for companies that may start paying dividends in the future. It also requires understanding how to extrapolate current and expected future earnings, ROE, and payout ratios to determine the projected growth rate and ultimately the intrinsic value per share.
The intrinsic value formula typically used when considering dividends:
\[ \text{Intrinsic Value} = \frac{D_1}{(r - g)} \]
Where:
- \( D_1 \) = Dividend next year
- \( r \) = Required rate of return (Market Capitalization Rate)
- \( g \) = Growth rate
For the first five years, since no dividends are paid, the growth in value comes from the reinvestment of earnings at the ROE.
Future](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff1fd60a6-e122-44a6-b63f-53f11d7f8fb8%2Ffe72ca19-bc29-4b4d-82a8-954c585f6587%2Fae7iix8_processed.png&w=3840&q=75)
Transcribed Image Text:### Valuing DEQS Corporation: An Educational Guide
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest Earnings Per Share (EPS) was $11.00, all of which was reinvested in the company. The firm’s expected Return on Equity (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.
---
#### Calculations:
**a. Estimating DEQS’s Intrinsic Value Per Share:**
- **Question:** 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** [Input Your Answer Here]
**b. Price Expectation Over the Next Year:**
- **Question:** 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** [Increase/Decrease] **by** [Input Your Dollar Value Here] **% per year until year 6.**
---
#### Explanation of Graphs and Diagrams:
No specific graphs or diagrams are provided in this content. However, understanding how to calculate intrinsic value involves using the Dividend Discount Model (DDM) for companies that may start paying dividends in the future. It also requires understanding how to extrapolate current and expected future earnings, ROE, and payout ratios to determine the projected growth rate and ultimately the intrinsic value per share.
The intrinsic value formula typically used when considering dividends:
\[ \text{Intrinsic Value} = \frac{D_1}{(r - g)} \]
Where:
- \( D_1 \) = Dividend next year
- \( r \) = Required rate of return (Market Capitalization Rate)
- \( g \) = Growth rate
For the first five years, since no dividends are paid, the growth in value comes from the reinvestment of earnings at the ROE.
Future
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 6 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education