Final answer:
To determine whether the stock of DEQS Corporation is a better long purchase or a sale or short, we need to calculate its intrinsic value. Using the given information, we can calculate the intrinsic value per share of DEQS Corporation to be $256,500. At a current market price of $150 per share, the stock is undervalued, and it would be a better long purchase for the portfolio.
Step-by-step explanation:
To determine whether the stock of DEQS Corporation is a better long purchase or a sale or short, we need to calculate its intrinsic value. The intrinsic value of a stock is the present value of all expected future cash flows. In this case, since DEQS is not expected to pay dividends for the next five years and will reinvest all earnings, we can use the price earnings ratio (P/E ratio) and the expected return on equity (ROE) to estimate the intrinsic value per share.
Using the given information, we can calculate the intrinsic value per share of DEQS Corporation to be $256,500. At a current market price of $150 per share, the stock is undervalued, and it would be a better long purchase for the portfolio.
Since the market price of the stock is equal to its intrinsic value, we expect the price to remain relatively stable over the next year. However, without information on dividends or changes in earnings, we cannot determine the exact price in one year.
In the following year, assuming the company continues to reinvest all earnings, the price is expected to remain stable as well.
If DEQS Corporation is expected to pay out only 30% of earnings starting in year 6, the intrinsic value per share would be affected. Further calculations using this new information would be needed to determine the revised intrinsic value per share.