Chemical Magic of New Orleans, Louisiana expects to receive dividends each year from a foreign subsidiary for the next 3 years. The dividend is expected to grow at a rate of 5% per year. If the euro depreciates in value against the dollar at a rate of 4% per year over the life of the dividends, then the present value of the euro dividends to Chemical Magic will be ________ if there had been no change in the relative values of the euro and dollar.

Question

Quizplus · Accepted Answer

Since the euro is depreciating in value against the dollar, the present value of the euro dividends will be less than if there had been no change in the relative values of the euro and dollar. Even with the 5% annual growth in dividends, the effect of the depreciating euro will outweigh the increase in dividends.

Chemical Magic of New Orleans, Louisiana Expects to Receive Dividends