Problem 4.1 BritMart's Returns Since it+ li+ting la+t year on the /S0 1, the maret value of rit3art ro+e from '21 to '24.*. /or each of the t he folloing ca+e+ calculate the rate of return, di+tingui+hing the dividend yield from the capital gain: a) rit3art pay+ no dividend %) rit3art decide+ to pay a dividend of '.* per +hare. +hare. c) rit3art paid the dividend, %ut the total return to the +hareholder i+ +eparated into the dividend yield and the capital gain. Assumptions Share price, P1 Share price, P2 Dividend paid, D2
Value £21.00 £23.50 £0.00
a. If the company paid no dividend (plugging zero in for the dividend): eturn ! ( D2 " P1 ) # ( P2 $ P1 ) " P1
11.905%
%. &nd if the company paid '.* per +hare: Assumptions Share price, P1 Share price, P2 Dividend paid, D2
otal +hareholder return, including di vidend+, i+:
Value £21.00 £23.50 £0.5 15.952%
eturn ! ( D2 " P1 ) # ( P2 $ P1 ) " P1 c. &++uming it did pay the dividend, +eparate the +hareholder5+ +hareholder5+ total return into it+ to component+ $$ the dividend yield and the capital gain. Dividend yield i+ D2 " P1
4.04%
-apital gain i+ (P2 $ P1) " (P1)
11.905%
otal +hareholder return i+ the +um of the to
15.952%
Problem 4.2. Romiana’s Returns (A). ennie Smith is a 3on,onbase, in+estor. She has been closel4 follo5ing her in+estment in 16000 shares of 7omiana6 an Italian 8rm that 5ent &ublic in 9ebruar4 2012. *hen she &urchase, her 16000 shares at €20 &er share6 the euro 5as tra,ing at £0.!"#/€. $urrentl46 the share is tra,ing at €2#.2# &er sh are6 an, the exchange rate is £0."22/€.
Assumptions Initial Share Price Number of shares Initial exchange rate (£/€) $urrent Share Price $urrent %xchange rate (£/€) .
€ 20 1000 0.!"# € 2#.2# 0."22 6
$hange in share &rice P2P1/P1
2'.2#
at is the &ercentage change in the +alue of the euro +ersus the &oun, o+er this same &e $hange in exchage rate 1!." c. *hat is the total return that ennie 5oul, earn on her shares if she sol, them at these otal return ber of shares x (1 change in share &ri
Problem 4.3 Romiana’s Returns (B). ennie Smith chooses not to sell her shares at the time ,escribe, in Problem 2. She 5aits6 ex&ecting the share &rice to rise further after the announcement of ;uarterl4 earnings.
Assumptions Initial Share Price Number of shares Initial exchange rate (£/€) $urrent Share Price $urrent %xchange rate (£/€)
€ 20 1000 0.!"# € !#.00 0."22
$hange in share &rice "#.00 7eturns umber of shares x (1change in share &ric
Problem 4.4 Romiana’s Returns (C). If the current s&ot exchange rate is £0."#/€. =sing the same &rices an, exchange rates as in Problem !6 7omiana (>)6 5hat 5oul, be the total return on the 7omiana in+estment in >ritish &oun,s-
Assumptions Initial Share Price Number of shares Initial exchange rate (£/€) $urrent Share Price $urrent %xchange rate (£/€) 7eturn in euros 7eturn in &oun,s
€ 20 1000 0.!"# € !#.00 0."# € 16"#0
Problem 4.5 Buil!in" #o$iet's !i&i!en! he folloing ta%le +ho+ the maret +hare price for a riti+h %uilding +ociety. Since it+ launch in Septem%er 26, the management intend+ to pay a fied annual dividend of ;P .* per +hare.
+ate Sep$6 Sep$* Sep$7 Sep$8 Sep$ Sep$9
losin" #*are Pri$e £200.00 £205.00 £21.00 £19.00 £150.00 £193.00
a. &verage +hareholder return for the period i+ eturn ! (P2 $ P1) " (P1) %. otal +hareholder return if the %ui lding +ociety had paid a con+tant dividend: eturn ! (P2 $ P1 # D) " (P1)
() +i&i!en! Pai!
#*are*ol!er Return ,-it*out +i&
#*are*ol!er Return ,-it* +i&
£0.50 £0.50 £0.50 £0.50 £0.50
2.50% 5.3/% 9.2% 23.4/% 2./%
2./5% 5.1% 9.03% 23.21% 29.00%
0./%
1.02%
Problem 4. +euts$*elan!ers Rate o) Return Deut+chlander 3otor -o. i++ue+ ne +toc+ and promi+e+ to pay an annual dividend of A1.*. /inancial foreca+ter+ predict that it+ maret +hare price ill ri+e from A1 to A12 after one year. Inve+tor+ epect ;erman automo%ile firm+ to reap a rate of return of 12?. S uppo+ing that you intend to hold the +toc in your portfolio for one year, +hould you inve+t in thi+ e@uity> Assumptions Share price, P1 Share price, P2 Dividend paid, D2
Value 100.00 120.00 1.50
otal +hareholder return for the period i+
21.50%
eturn ! (P2 $ P1 # D2) " (P1) he +hare5+ epected return of 21.*? far eceed+ the re@uired return of 12?. It i+ therefore a very good inve+tment.
Problem 4./ as*ion A$uisitions
he price"earning+ ratio (P"0) i+ one of the tool+ u+ed to compare companie+ in the +ame +ector. & high P"0 ratio mean+ that inve+tor+ pay more for each Si++ franc of net income, e+pecially if they %elieve that it ha+ future potential. Due to high re+earch and development epen+e+ incurred %y pharmaceutical firm+, their P"0 i+ u+ually higher than tho+e of other indu+trie+. SmallPhar and 0uroPhar are hypothetical pharmaceutical firm+ regi+tered on the Si++ 0change in urich. 0uroPhar i+ con+idering ac@uiring SmallPhar to tae advantage of it+ future groth and potential ne drug production. he folloing ta%le +ummarize+ the financial +ituation of %oth firm+: Mar6et 7otal 8umber &alue Mar6et ompan P: ratio o) s*ares per s*are :arnin"s :P# Value #mallP*ar 35 2;000;000 < 35.00 2;000;000 < 1.00 /0;000;000 :uroP*ar 20 10;000;000 < 30.00 15;000;000 < 1.50 300;000;000 0uroPhar ant+ to ac@uire SmallPhar. It offer+ 2,*, +hare+ of 0uroPhar, ith a current maret value of -
2;500;000
a. =*at is t*e total number o) outstan!in" s*ares t*at :uroP*ar -ill *a&e a)ter a$uirin" #mallP*ar>
1,, # 2,*,
12;500;000
SmallPhar5+ +hare+ are orth -
SmallPar earning+ # 0uroPhar earning+
(-
-
1/;000;000
$. () t*e P: ratio a)ter t*e $apitali?ation stas at 20; -*at -oul! be t*e ne- mar6et &alue o) :uroP*ar>
P"0 -on+olidated earning+ !
2 4*
-
340;000;000
d. And what would be EuroPhar’s new EPS 4*,,"12,*,
< 1.3
e. =*at is t*e ne- mar6et &alue o) a s*are o) :uroP*ar>
Be maret value " total +hare+ out+tanding ! 8,, " 12,*,
-
2/.20
-
2.0
).
-
9.33%
". Assume t*at t*e mar6et ta6es a ne"ati&e &ie- o) t*e a$uisition an! lo-ers :uroP*ar's P: ratio to 10. =*at -oul! be t*e ne- mar6et pri$e per s*are o) sto$6> =*at -oul! be its per$enta"e loss>
4*,, 1 Be maret price per +hare ! total maret value " +hare+ out+tanding ! Percentage lo++ to original 3odern &merican +hareholder+ ! (C4.81 $ C6.)" (C6.)
-
1
1/0;000;000 < 13.0 54./%
Problem 4. orporate @o&ernan$e &erstatin" :arnin"s &fter the numerou+ ca+e+ of fraud+ and +candal+, a num%er of firm+ had to loer their previou+ly reported earning+ due to accounting error+ or fraud. &++ume that 0uroPhar in the previou+ pro%lem had to loer it+ earning+ to - -ould it +till do the ac@ui+ition>
ompan #mall P*ar :uro P*ar
P: ratio
35 20
8umber o) s*ares 2;000;000 10;000;000
Mar6et &alue per s*are
:arnin"s
:P#
7otal Mar6et Value
< 35.00 < 30.00
20;000;000 10;000;000
< 1.00 < 1.50
/0;000;000 300;000;000
() earnin"s -ere lo-ere! to < 10;000;000 $oul! :uro P*ar still !o t*e !eal>
Small Phar need to %e paid their maret value plu+ a premium of 8.16? hich i+ in -
/4;99;000
&t ne maret rate+ for 3odern &merican, thi+ ould re@uire the offer of (-
2;499;933
+hare+
herefore the ac@ui+tion can +till tae place.
Problem 4.9 Ce*ti Manu)a$turin" ,A Dual cla++e+ of common +toc are common in a num%er of countrie+. &++ume that Hehti 3anufacturing ha+ the folloing capital +tructure at %oo value. he &$+hare+ each have ten vote+ and the $+hare+ each have one vote per +hare.
Ce*ti Manu)a$turin" Fong$term de%t etained earning+ Paid$in common +toc: 1 million &$+hare+ Paid$in common +toc: 6 million $+hare+ otal long$term capital
Do$al urren$ ,millions 200 300 100 400 1;000
Votes per s*are
7otal Votes
10.00 1.00
1;000 400 1;400
a. =*at proportion o) t*e total lon"term $apital *as been raise! b As*ares>
&$+hare+ " otal long$term capital
1 " 1,
10.00%
1, " 1,6
/1.43%
1 " (1 # 6)
20.00%
b. =*at proportion o) &otin" ri"*ts is represente! b As*ares>
&$+hare total vote+ " otal Gote+ $. =*at proportion o) t*e !i&i!en!s s*oul! t*e As*ares re$ei&e>
&$+hare+ in local currency " otal e@uity +hare+ in local currency
Problem 4.10 Ce*ti Manu)a$turin" ,B &++uming all of the +ame de%t and e@uity value+ for Hehti 3anufacturing in pro%lem 9, ith the +ole eception that %oth &$ +hare+ and $+hare+ have the +ame voting right+, one vote per +hare:
Ce*ti Manu)a$turin" Fong$term de%t etained earning+ Paid$in common +toc: 1 million &$+hare+ Paid$in common +toc: 6 million $+hare+ otal long$term capital
Do$al urren$ ,millions 200 300 100 400 1;000
Votes per s*are
7otal Votes
1.00 1.00
100 400 500
a. =*at proportion o) t*e total lon"term $apital *as been raise! b As*ares>
&$+hare+ " otal long$term capital
1 " 1,
10.00%
1 " *
20.00%
1 " (1 # 6)
20.00%
b. =*at proportion o) &otin" ri"*ts is represente! b As*ares>
&$+hare total vote+ " otal Gote+ $. =*at proportion o) t*e !i&i!en!s s*oul! t*e As*ares re$ei&e>
&$+hare+ in local currency " otal e@uity +hare+ in local currency
Problem 4.!!. So"tie Bab#$e% (A). Softie >ab4ex is an In,ianbase, textile 8rm that &ro,uces all its 8nancials in In,ian ru&ees (IN7). Softie >ab4exAs sales ,irector6 Simon Smart6 5as blame, for ,eclining sales in the =nite, ?ing,om. Simon ,isagrees6 claiming that sales in the =nite, ?ing,om ha+e gro5n stea,il4 in recent 4ears. $om&lete the table belo5 to 8n, out 5hether Simon is correct. Assumptions otal net sales6 IN7 =? Sales ( of total sales) otal =? sales6 IN7 B+erage exchange rate6 IN7/£ otal =? sales6 £
2&!3 2&!4 2&!' #0 @# @@ 1%00' 1%00' 1%00' 100 102 10# 10000 10!' 10@"'
he =? &ercentage share of total sales sho5s a consistent ,ecline6 but the absolute +alue 5hether in terms of IN7 or &oun, is rising.
Problem 4.12 Dantau Beer ,B Eapanese Cen +ebt Fantau eer of Analsis o) Eapanese en+enominate! +ebt Annual en paments on !ebt a"reement ,F A&era"e eG$*an"e rate; F
200 12;000;000 12.3 9//;199
2009 12;000;000 12.1 994;200
2010 12;000;000 11.4 1;05/;29
he analy+i+ of de%t +ervice payment+ on the Japane+e yen$denominated long$term loan indicate+ that for the pa+t to year+ the effective co+t of repaying the loan, in
Mattel's @lobal #ales 3attel (MS) achieved +ignificant +ale+ groth in it+ maNo r international region+ %eteen 21 and 26. In it+ filing+ ith the Mnited State+ Security and 0change -ommi++ion (S0-), it reported hat percentage change in regional +ale+ occurred a+ a re+ult of echange rate change+.
Mattel's Global Sales
,t*ousan!s o) J#I :urope Datin Ameri$a ana!a Asia Pa$i)i$ 7otal (nternational Jnite! #tates #ales A!Kustments 7otal 8et #ales
I
I I
2001 #ales ,I 933;450 4/1;301 155;/91 119;/49 1;0;291 3;392;24 ,34;51 4;/;924
Re"ion :urope Datin Ameri$a ana!a Asia Pa$i)i$
I
I
I
2002 #ales ,I 1;12;1// 4;349 11;49 13;944 1;90;939 3;422;405 ,42;004 4;5;340
I
I
I
2003 #ales ,I 1;35;131 42;1/ 15;31 1/1;50 2;1/5;/09 3;203;14 ,419;423 4;90;100
I
I
I
2004 #ales ,I 1;410;525 524;41 19/;55 203;5/5 2;33;23 3;209;2 ,443;312 5;102;/
(mpa$t o) *an"e in urren$ Rates 20012002 20022003 20032004 /.0% 15.0% .0% 9.0% .0% 2.0% 0.0% 11.0% 5.0% 3.0% 13.0% .0%
Source: 3attel, &nnual eport, 22, 24, 26. a. =*at -as t*e per$enta"e $*an"e in sales; in J# !ollars; b re"ion> b. =*at -as t*e per$enta"e $*an"e in sales b re"ion net o) $urren$ $*an"e impa$ts> $. =*at -as t*e a$tual J# !ollar sales le⪕ b re"ion; net o) $urren$ $*an"es> !. =*at relati&e impa$t !i! $urren$ $*an"es *a&e on t*e le&el an! "ro-t* o) Mattel's $onsoli!ate! sales )or t*e 2001 to 2004 perio!>
Problem 4.13 Mattel's @lobal #ales Per)orman$e 3attel (M.S.) achieved +ignificant +ale+ groth in it+ maNor international region+ %eteen 21 and 26. In it+ filing+ ith the Mnited State+ Security and 0change -ommi++ion (S0-), it reported hat percentage change in regional +ale+ occurred a+ a re+ult of echange rate change+. Ans-er to a Ans-er to b ,1 ,2 ,3 Per$ent (mpa$t o) 8et 2001 2002 *an"e in *an"e in *an"e in ,t*ousan!s o) J#I #ales ,I #ales ,I @ross #ales urren$ Rates #ales :urope I 933;450 I 1;12;1// 20.% /.0% 13.% Datin Ameri$a 4/1;301 4;349 1.1% 9.0% /.9% ana!a 155;/91 11;49 3.% 0.0% 3.% Asia Pa$i)i$ 119;/49 13;944 14.4% 3.0% 11.4% 7otal (nternational I 1;0;291 I 1;90;939 12.5% Jnite! #tates 3;392;24 3;422;405 0.9% #ales A!Kustments ,34;51 ,42;004 11.3% 7otal 8et #ales I 4;/;924 I 4;5;340 4.2%
,t*ousan!s o) J#I :urope Datin Ameri$a ana!a Asia Pa$i)i$ 7otal (nternational Jnite! #tates #ales A!Kustments 7otal 8et #ales
,t*ousan!s o) J#I :urope Datin Ameri$a ana!a Asia Pa$i)i$ 7otal (nternational Jnite! #tates #ales A!Kustments 7otal 8et #ales
I
I I
I
I I
2002 #ales ,I 1;12;1// 4;349 11;49 13;944 1;90;939 3;422;405 ,42;004 4;5;340
2003 #ales ,I 1;35;131 42;1/ 15;31 1/1;50 2;1/5;/09 3;203;14 ,419;423 4;90;100
I
I
I
I
I
I
2003 #ales ,I 1;35;131 42;1/ 15;31 1/1;50 2;1/5;/09 3;203;14 ,419;423 4;90;100
,1 Per$ent *an"e in @ross #ales 20.4% 0.9% 15.1% 25.3% 15.1% .4% 2.0% 1.5%
,2 (mpa$t o) *an"e in urren$ Rates 15.0% .0% 11.0% 13.0%
,3 8et *an"e in #ales 5.4% 5.1% 4.1% 12.3%
2004 #ales ,I 1;410;525 524;41 19/;55 203;5/5 2;33;23 3;209;2 ,443;312 5;102;/
,1 Per$ent *an"e in @ross #ales 4.0% 13.5% .4% 1.% /.4% 0.2% 5./% 2.9%
,2 (mpa$t o) *an"e in urren$ Rates .0% 2.0% 5.0% .0%
,3 8et *an"e in #ales 4.0% 15.5% 1.4% 12.%
Bote: he Lnet change in +ale+L %y glo%al region i+ determined %y netting the change in currency rate+ from the calcualted percent change in gro++ +ale+. -olumn (4) ! -olumn (1) # -olumn (2). Ans-er to $
Kver the 21 to 26 period, 3attel %enefited greatly from the change in echange rate+. Knly in the ca+e of Fatin &merica, here echange rate change+ ere actually negative in impact on +ale+ level+ for the entire period, did the echange rate change+ not po+itively impact regional +ale+.
Problem 4.14 *inese #our$in" an! t*e Cuan Assumptions 7otal sstem $ost ,I ost sa&in"s )rom siG si"malean 7otal sstem $ost ,I <!rauli$ tubin"; % o) total <!rauli$ tubin" ,I
ri"inalurrent I0;000.00 4.0% I44;00.00 20.0% I1;90.00
Re&aluation>
uture>
I19;235.20
& 12? revaluation of the yuan ould %e calculated: Huan .2 " (1 # ? change) :G$*an"e rate ,uanI <!rauli$ tubin" ,uan
.2 1;39;9.0
ost in$rease as a result o) re&aluation 7otal sstem $ost a)ter re&aluation
12.0%
/.39 1;39;9.0 I20;2/5.20 I5;0/5.20
a. he revaluation of the -hine+e yuan %y 12? ould completely nullify all of the co+t reduction %enefit+ achieved via the +i +igma"lean manufacturing initiative+ recently completed. %. he percentage change in the co+t of the total hydraulic +y+tem can %e calculated %y multiplying the percentage increa+e in the echange rate time+ the pe rcent of total co+t made up %y the hydraulic tu%ing: <!rauli$ tubin"; % o) total Per$ent re&aluation o) t*e uan 7otal sstem $ost impa$t; per$ent 8e- total sstem $ost ,I l! total sstem $ost ,I Per$ent $*an"e
20.0% 12.0% 2.40% I5;0/5.20 I44;00.00 2.40%
Problem 4.15 #LP 500 :uit Returns 19302010 he M.S. e@uity maret+ have delivered very different return+ over the pa+t 9 year+. M+e the folloing data arranged %y decade to an+er the folloing @ue+tion+ a%out the+e M.S. e@uity inve+tment return+. a. %. c. d.
Ehich period +hon had the highe+t total return+> he loe+t> Ehich decade had the highe+t dividend return+> Ehen ere dividend+ clearly not a priority for pu%licly traded companie+> he 199+ a+ a %oom period for M.S. e@uity return+.
#LP 500 :uit Returns; 1922014 ,a&era"e annual return; per$ent Perio! -apital appreciation Dividend yield otal return
1930s $*.4? *.6? .1?
1940s 4.? 7.? 9.?
1950s 14.7? *.1? 1.8?
190s 6.6? 4.4? 8.8?
19/0s 1.7? 6.2? *.?
190s 12.7? 6.6? 18.?
1990s 1*.4? 2.*? 18.?
2000s $2.8? 1.? $.9?
192 to 2014 *.9? 6.? 9.9?
a. =*i$* perio! s*o-n *a! t*e *i"*est total returns> 7*e lo-est>
he 19*+ $$ +omehat +urpri+ingly $$ had the highe+t total return+. he loe+t ere the 2+. b. =*i$* !e$a!e *a! t*e *i"*est !i&i!en! returns> =*en -ere !i&i!en!s $learl not a priorit )or publi$l tra!e! $ompanies>
Dividend return+ ere the highe+t in the 196+. Since 2 dividend yield+ have clearly %een a loer priority. $. 7*e 1990s -as a boo m perio! )or J.#. euit returns.
Dividend di+tri%ution+"yield+ ere clearly don during thi+ era. !.
& negative return for 2+ +ho+ pretty aful performanceO -ompanie+ are increa+ing dividend+ $$ no $$$ finally $$ a+ a re+ult.
#LP 500 :uit Returns; 1922014 ,a&era"e annual return; per$ent Perio! -apital appreciation Dividend yield otal return
1930s $*.4? *.6? .1?
1940s 4.? 7.? 9.?
1950s 14.7? *.1? 1.8?
190s 6.6? 4.4? 8.8?
Source: Data dran from LJP 3organ ;uide to the 3aret+, 21*,L JP 3organ &++et 3anagement.
19/0s 1.7? 6.2? *.?
190s 12.7? 6.6? 18.?
1990s 1*.4? 2.*? 18.?
2000s $2.8? 1.? $.9?
192 to 2014 *.9? 6.? 9.9?
