EBK INVESTMENTS
EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 25, Problem 3PS
Summary Introduction

(a)

To calculate:

The number of shares that an investor can purchase by investing $10000 in a British firm when the rate of exchange is $2/pound

Introduction:

For investing in a British firm, investor of U.S. has to change its funds into the pound and then should compute the number of shares which he can invest in the firm.

Expert Solution
Check Mark

Answer to Problem 3PS

The number of shares that can be purchased by investor in British firm is 125 shares .

Explanation of Solution

Given:

  Current price per share=Pound 40 per shareTotal investment=$10000Rate of exchange=$2/pound

To calculate total number of shares, first total investment given in dollars should be converted to Euro which is calculated on the basis of Rate of Exchange and then, the total investment should be divided with current price per share.

  Investment value in pound=$10000$2=Pound 5000

  Number of shares=Pound 5000Pound 40=125 shares

Thus, number of shares that can be purchased is 125 shares .

Summary Introduction

(b)

To calculate:

The rates of return in dollar-denominated after one year in different scenarios and pound-denominated return.

Introduction:

For investing in a British firm, investor of U.S. has to change its funds into the pound and then should compute the number of shares which he can invest in the firm.

Expert Solution
Check Mark

Answer to Problem 3PS

Below table highlights the values for all nine cases:

    Per share price (£) Pound-Denominated Return (%) Dollar-Denominated Return (%) for year-end exchange Rate

      $1.80/£

      $2.00/£

      $2.20/£
    £ 35 12.5% 21.25% 12.5% 3.75%
    £ 40 0.0% 10.00% 0.00% 10.00%
    £ 45 12.5% 1.25% 12.5% 23.75%

Explanation of Solution

Given:

  Current price per share=Pound 40 per shareTotal investment=$10000Rate of exchange=$2/pound

Let's first calculate the pound-denominated return and for that, the following formula is used:

  Pound-denominated return=Number of shares Current priceBase priceInitial investment in Pound

By using the above formula, Pound-denominated return is computed as follows:

    Per share price (£) Pound-Denominated Return (%)
    £35 Return=125 £35£40£5000 =£4375£5000£5000 =12.5%
    £40 Return=125 £40£40£5000 =£5000£5000£5000 =0.00%
    £45 Return=125 £45£40£5000 =£5625£5000£5000 =12.5%

Now, calculate the dollar-denominated return and for that, the following formula is used:

  Dollar-denominated return=Number of shares Current price×new rate Base price×base rate Initial investment in Dollar

By using the above formula, Dollar-denominated return is computed as follows:

    Per share price (£) Dollar-Denominated Return (%) for year-end exchange Rate

      $1.80/£

      $2.00/£

      $2.20/£
    £35 Return=$7875$10000$10000 =21.25% Return=$8750$10000$10000 =12.5% Return=$9625$10000$10000 =3.75%
    £40 Return=$9000$10000$10000 =10% Return=$10000$10000$10000 =0.00% Return=$11000$10000$10000 =10%
    £45 Return=$10125$10000$10000 =1.25% Return=$11250$10000$10000 =12.5% Return=$12375$10000$10000 =23.75%
Summary Introduction

(c)

To calculate:

The situation in which the dollar-denominated return will be equal to the pound-denominated return.

Introduction:

For investing in a British firm, investor of U.S. has to change its funds into the pound and then should compute the number of shares which he can invest in the firm.

Expert Solution
Check Mark

Answer to Problem 3PS

The situation is when there will be no change in the exchange rates.

Explanation of Solution

Given:

  Current price per share=Pound 40 per shareTotal investment=$10000Rate of exchange=$2/pound

The dollar denomination returns will be equal to the pound denomination return when there is no change over the exchange rate in one year even if the price of the share changes.

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Students have asked these similar questions
Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $10,000 to invest, and the current exchange rate is $2/£. a. How many shares can the investor purchase? Number of shares    =      b. Fill in the table below for rates of return after one year in each of the nine scenarios (three possible prices per share in pounds times three possible exchange rates). (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)   Price per Share (£) Pound-Denominated Return (%) Dollar-Denominated Return (%)for Year-End Exchange Rate     $1.80/£ $2/£ $2.20/£ £35   % % %   %   %   % £40   % % %   %   %   % £45   % % %   %   %   %
Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $12,000 to invest, and the current exchange rate is $2/£. a. How many shares can the investor purchase? (Round your answer to the nearest whole number.) Number of shares b. Fill in the table below for rates of return after one year in each of the nine scenarios (three possible share prices denominated in pounds times three possible exchange rates). (Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "O" wherever required. Negative amounts should be indicated by a minus sign.) Dollar-Denominated Return (%) for Year-End Exchange Rate Price per Share (£) Pound-Denominated Return (%) $1.60/£ $2.00/£ $2.40/£ % % % % % £ 36 % % % % £ 41 % £ 46 % %
Suppose a U.S. investor wishes to invest in a British firm currently selling for £100 per share. The investor has $24,000 to invest, and the current exchange rate is $2/£.   Required:a. How many shares can the investor purchase? (Round your answer to the nearest whole number.)   b. Fill in the table below for dollar-denominated rates of return after one year in each of the nine scenarios (three possible share prices denominated in pounds times three possible exchange rates). (Round your percentage answers to 2 decimal places. Negative amounts should be indicated by a minus sign.)
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