After all foreign and U.S. taxes, a U.S. corporationexpects to receive 2 pounds of dividends per share from a British subsidiary this year.The exchange rate at the end of the year is expected to be $1.29 per pound, and the poundis expected to depreciate 5% against the dollar each year for an indefinite period. The dividend(in pounds) is expected to grow at 10% a year indefinitely. The parent U.S. corporationowns 10 million shares of the subsidiary. What is the present value in dollars of its equityownership of the subsidiary? Assume a cost of equity capital of 11% for the subsidiary.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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After all foreign and U.S. taxes, a U.S. corporation
expects to receive 2 pounds of dividends per share from a British subsidiary this year.
The exchange rate at the end of the year is expected to be $1.29 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 10% a year indefinitely. The parent U.S. corporation
owns 10 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 11% for the subsidiary.

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