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 4 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 $0.13 per peso. After this, the peso is expected to depreciate against the dollar at a rate of 5% 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 6% a year indefinitely. Chapman owns 5 million shares of V. Gomez. What is the present value of the dividend stream, in dollars, assuming V. Gomez's cost of equity is 12%? Do not round intermediate calculations. Round your answer to the nearest dollar. Enter your answer in dollars.

Explanation / Answer

Dollar dividend in year 1 = 4 x 0.13 = $0.52 per share

Total Dividend in year 1, D1 = 5m x 0.52 = 2.60m

Dollar Growth rate, g = (1 + 6%) x (1 - 5%) - 1 = 0.7%

PV of dividend stream = D1 / (r - g) = 2.60 / (12% - 0.7%) = $23,008,850

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