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The 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 firm’s 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 firm’s 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. DEQS’s market capitalization rate is 19% 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. 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 rise by ______%? per year until year 6: because there is no dividend, the entire return must be in capital gains.
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