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 $19.50, 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 10%, and the company is expected to start paying out 50% of its earnings in cash dividends, which it will continue to do forever after. DEQS’s market capitalization rate is 26% per year. What is your estimate of DEQS's intrinsic value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

$32.34

Explanation:

year                      dividend              EPS

0                              0                       $19.50

1                               0                       $22.43

2                              0                       $25.79

3                              0                       $29.66

4                              0                       $34.11

5                              0                       $39.22

6                              $21.57              $43.14

growth rate up to year 5 = 15%

ROE growth rate starting year 6 = 10%

sustainable growth rate starting year 6 = 10% x (1 - 50%) = 5%

cost of equity = 26%

horizon value at year 5 = $21.57 / (26% - 5%) = $102.71

current intrinsic value per stock = $102.71 / 1.26⁵ = $32.34

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