present value in dollars of equity ownership of the subsidiary; price changes due to changes in exchange rates

16-8:  After all foreign and U.S. taxes, a U.S. corporation expects to receive 3 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be $1.60 per pound, and the pound is expected to depreciate 5 percent against the dollar each year for an indefinite period. The dividend (in pounds) is expected to grow at 10 percent a year indefinitely. The parent U.S. corporation owns 10 million share of the subsidiary. What is the present value in dollars of its equity ownership of the subsidiary? Assume a cost of equity capital of 15 percent for the subsidiary.


16-13:  Early in September 1983, it took 245 Japanese yen to equal $1. In August 2002, 19 years later, that exchange rate had fallen to 121 yen to $1. Assume the price of a Japanese manufactured automobile was $9,000 in September 1983 and that its price changes were in direct relation to exchange rates.


a. Has the price, in dollars, of the automobile increased or decreased during the 19-year period because of changes in the exchange rate?

b. What would the dollar price of the automobile be in August 2002, again assuming that the car's price changes only with exchange rates?

Attached file(s):

PROBLEM SET 4.xls  View File