50p * 0.10 = $5
Price at t=0 "P0"...use Gordon growth model...
P0 = D1 / (r - g)
P0 = 5 / (0.13 - 0.03846)
= $54.62 per share
Now I'm rethinking this. Need more coffee.
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 US 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 US 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 of equity is 13%?
Kindly provide step-by-step solution.
Thanks!
