after all foreign and us taxes, a us corporation expects to receive 5 pounds of

Question

after all foreign and us taxes, a us corporation expects to receive 5 pounds of dividends per share from a british subsidiary this year. the exchange rate at the end of the year is expected to be $1.82 per pound and the pound is expected to depreciate 5% against the dollar each year for an indefinite period. the dividend in pounds is expected to grow at 7% a year indefinitely. The parent us corporation owns 5 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 16% for the subsidiary. round your answer to two decimal places

Explanation / Answer

Dividend in dollars = 5*$1.82 = $9.1 Growth rate = 7%-5% = 2% Price of the stock = $9.1*(1+2%)/(16%-2%) = $66.3 present value in dollars of its equity ownership of the subsidiary = $66.3*5 million =$331.5 million

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