Chapman, Inc.'s Mexican subsidiary, V. Gomez Corporation, is expected to pay to Chapman 50 pesos in dividends
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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 $0.07 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 5% a year indefinitely. Chapman owns 15 million shares of V. Gomez.
What is the present value of the dividend stream, in dollars, assuming V. Gomez's cost of equity is 14%?
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