Foreign Investment Analysis Sevall Inc\'s Mexican Subsidiary, Cancunrocks, is ex
ID: 2722321 • Letter: F
Question
Foreign Investment Analysis Sevall Inc's Mexican Subsidiary, Cancunrocks, is expected to pay Sevall 1 Peso per share in 1 year after all foreign and US taxes have been accounted for. 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 by 2% forever due to inflation differences between the US and Mexico. The peso denominated dividend is expected to grow at 7% a year indefinitely. Sevall owns 10M shares of Cancunrocks. Assuming that the cost of equity is 12%, what is the valuation of Cancunrocks in US dollars? Foreign Investment Analysis Sevall Inc's Mexican Subsidiary, Cancunrocks, is expected to pay Sevall 1 Peso per share in 1 year after all foreign and US taxes have been accounted for. 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 by 2% forever due to inflation differences between the US and Mexico. The peso denominated dividend is expected to grow at 7% a year indefinitely. Sevall owns 10M shares of Cancunrocks. Assuming that the cost of equity is 12%, what is the valuation of Cancunrocks in US dollars?Explanation / Answer
We will have to calculate the equity value per share with the use of dividend growth model as follows:
Equity Value Per Share = D1/(Cost of Capital - Growth Rate)
Where D1 = $.10 and Growth Rate in US Dollars = 7% - 2% (inflation) = 5%
Using the values provided in the question, we get,
Equity Value Per Share = (1*.10)/(12% - 5%) = $1.428571
The total value of Cancunrocks holding is $14,285,714 (1.428571*10,000,000)
Answer is $14,285,714