Chapman Inc.\'s Mexican subsidiary, V. Gomez Corporation, is expected to pay to

Question

Chapman Inc.'s Mexican subsidiary, V. Gomez Corporation, is expected to pay to Chapman 50 pesos in dividends in 1 year after all foreign and U.S. taxes have been subtracted. The exchange rate in 1 year is expected to be 0.10 dollars per peso. After this, the peso is expected to depreciate against the dollar at a rate of 4% a year forever due to the different inflation rates in the United States and Mexico. the peso-denominated dividend is expected to grow at a rate of 8% a year indefinitely. Chapman owns 10 million shares of V. Gomez. What is the present value of the dividend stream, in dollars, assuming V. Gomez's cost equity is 13%

Explanation / Answer

value of dividend = 50*1.08 = 54 pesos

value of dollar    = 0.10- ( 0.1*0.04)

                        = 0.096

Total dividends = 54 pesos* 10 million shares

                        = 54 million pesos

dividends in $ = 54 *0.096

                     = $ 5.184 millions

Present value = 5.184/1.13

                    = $ 4.5876 millions

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