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Chapter 5: Q15DQ (page 680)

What are ADRs?

Short Answer

Expert verified

ADRs stand for American depositary receipts. ADRs are one of the most convenient and popular ways for investors to buy stocks of companies based outside the U.S.

Step by step solution

01

Definition

American depositary receipts (ADRs) are a negotiable certificate issued by a U.S. depositary bank representing a specified number of shares.

02

Trading of ADRs

ADRs are traded on the U.S. stock market when a company wants to collect dollar currency. It offers U.S. investors a way to purchase stock in overseas companies that would not be available otherwise. ADRs and their dividends are priced in U.S. dollars. All of this makes it easier for Americans to invest in foreign companies.

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Most popular questions from this chapter

From the base price level of 100 in 1979, Saudi Arabian and U.S. price levels in 2008 stood at 200 and 410, respectively. If the 1979 \(/riyal exchange rate was \)0.26/riyal, what should the exchange rate be in 2008? Suggestion: using purchasing power parity, adjust the exchange rate to compensate for inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of 0.26.

If a firm wishes to achieve immediate appreciation in earnings per share as a result of a merger, how can this be best accomplished in terms of exchange variables? What is a possible drawback to this approach in terms of long-range considerations?

What factors beyond the normal domestic analysis go into a financial feasibility study for a multinational firm?

A Peruvian investor buys 150 shares of a U.S. stock for \(7,500 (\)50 per share). Over a year, the stock goes up by \(4 per share.

  1. If there is a 10 percent gain in the value of the dollar versus the Peruvian nuevo sol, what will be the total percentage return to the Peruvian investor? First, determine the new dollar value of the investment and multiply this figure by 1.10. Divide this answer by \)7,500 and get a percentage value, and then subtract 100 percent to get the percentage return.
  2. Instead assume that the stock increases by $7, but that the dollar decreases by 10 percent versus the nuevo sol. What will be the total percentage return to the Peruvian investor? Use 0.90 in place of 1.10 in this case.

Why might the portfolio effect of a merger provide a higher valuation for the participating firms?

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