Question

34 - 36

34. You are interested in not only US stocks but also foreign stocks. You are considering whether to invest in American Depositary Receipts (ADRs, they represent ownership in the shares of a foreign company trading on the US financial markets.) of a Japanese company and a South American company. Other than market risk and firm risk, currency risk is also a concern. You know that both firms' major profits come from their domestic operations. You believe in the future the US dollar will depreciate against Japanese yen and appreciate against Argentine peso. Which of the following is true? a. The exchange rate change will decrease the dollar price of the Japanese y's ADR and increase the dollar price of the Argentine company's ADR. b. The exchange rate change will decrease the dollar price of both companies ADRs. c. The exchange rate change will increase the dollar price of the Japanese company's ADR and decrease the dollar price of the Argentine company's ADR. d. The exchange rate change will increase the dollar price of both companies' ADRs. Questions 28-34 end. Questions 35-40 are based on the following information. Corporate finance. You are the CFO of the Stocks-and-bonds company. Both your company's stock and bonds are traded in the NYSE. 35. If you think your company's stock is currently undervalued by the market, you would like to a. issue more shares. b. repurchase some shares. c. issue more bonds. d. call back your company's old bonds and issue new bonds. 36. Another company also thinks your company's stock is currently undervalued by the market. So, it wants to buy a large number of your company's shares to control your firm. If you want to defend the takeover, you would a. issue more shares. b. repurchase some shares. c. lay off your company's employees. d. call back your company's old bonds and issue new bonds.

Answer 1

Solution:

If we believe that dollar will depreciate against the Japanese yen and appreciate against the Argentina Peso this mean that more dollars can be bought now with the same amount of yen. Generally done to boost exports and to get higher foreign currency in the country.

Currency appreciation on the other hand would mean that dollar has become expensive or Pesso has become cheaper for the same amount of dollars and hence for the same amount of peso we will be getting lesser number of dollars.

Eg: if the exchange rate if 100 Yen = 1 Dollar and in future the anticipated rate is 80 yen = 1 Dollar i.e. we can now buy a dollar with 80 yen.

In converting the price of a Japanese ADR into dollars we divide the amount by 100 or 80 i.e. the denominator is the Yen/dollar rate and as it will decrease the dollar price would increase and reverse in the case of Argentina peso.

Option A: The exchange rate will decrease the dollar price of the Japanese ADR and Increase the dollar price for Peso. As discussed its the other way around.

Option B: Again an incorrect option

Option C: Correct Option i.e. the dollar price of the Japanese ADR would increase with dollar depreciating and dollar price for peso would decrease.

Option D: Again an incorrect option.