Question

After all foreign and U.S. taxes, a U.S. corporation expects to receive 3 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be $1.33 per pound, and the pound is expected to depreciate 3% against the dollar each year for an indefinite period. The dividend (in pounds) is expected to grow at 8% a year indefinitely. The parent U.S. corporation owns 9 million shares of the subsidiary. What is the present value in dollars of its equity ownership of the subsidiary? Assume a cost of equity capital of 12% for the subsidiary. Do not round intermediate calculations. Round your answer to the nearest dollar.

$ ____

Answer 1

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Answer:

Present value in dollars:

This Year’s dividend = 3.0 pounds x 1.33 = $ 3.99 per share

The dividend in pounds grows at 8%, but the pound depreciates at 3%. Thus, the dollar dividend will grow at 5%.

Value per share (Po) using the perpetual growth valuation formula:

$3.99 ÷ (0.12-0.05) = $57

The total value of the equity is $57 x 9,000,000 = $513,000,000