Foreign Investment Analysis Sevall Inc\'s Mexican Subsidiary, Cancunrocks, is ex
ID: 2724370 • 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
Dividend paid= 1peso per year
in dollar at year 1 =1*.1=$0.1
After year 1 the dividend after considering depreciation and growth
=0.1/(1-0.98)=5
Value= (5*10m)/(12%-7%)
=1000mn