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Problem 4.3 Vaniteux's Returns (A)

Spencer Grant purchased 100 shares of Vaniteux, a French firm, in 2010 for €17.25 per share when the exchange rate was $1.360/€. Now, shares are trading at €28.33 and the exchange rate is $1.4170/€. If Spencer sells his shares now, he would receive a 64.23% increase in share price and the euro increased 4.19% against the dollar. Selling now would yield Spencer a total return of 71.12% on his original investment of $2,346.

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147 views

Problem 4.3 Vaniteux's Returns (A)

Spencer Grant purchased 100 shares of Vaniteux, a French firm, in 2010 for €17.25 per share when the exchange rate was $1.360/€. Now, shares are trading at €28.33 and the exchange rate is $1.4170/€. If Spencer sells his shares now, he would receive a 64.23% increase in share price and the euro increased 4.19% against the dollar. Selling now would yield Spencer a total return of 71.12% on his original investment of $2,346.

Uploaded by

Samer
Copyright
© © All Rights Reserved
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Download as XLS, PDF, TXT or read online on Scribd
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Problem 4.

3 Vaniteux's Returns (A)

Spencer Grant is a New York-based investor. He has been closely following his investment in 100 shares of
Vaniteux, a French firm that went public in February of 2010. When he purchased his 100 shares at €17.25 per
share, the euro was trading at $1.360/€. Currently, the share is trading at €28.33 per share, and the dollar has
fallen to $1.4170/€.

a. If Spencer sells his shares today, what percentage change in the share price would he receive?

b. What is the percentage change in the value of euro versus the dollar over this same period?

c. What would be the total return Spencer would earn on his shares if he sold them at these rates?

Share Exchange Rate


Assumptions Price (US$/€)
Prices when Spencer purchased his shares € 17.25 1.3600
Prices Spencer sees in the market today € 28.33 1.4170

a. If Spencer sold his shares today, what is the percentage change in the share price he would receive?

Return = (P2 - P1) / (P1) 64.23%

b. What has been the percentage change in the value of euro versus the dollar over this same period?

Percentage change (US$/€) = ( S2 - S1 ) / (S1) 4.19%

c. What would be the total return Spencer would earn on his shares if he sold them at these rates?

If he sold his shares today, it would yield the following amount in euros: € 2,833.00
These euros would in turn be worth the following in US dollars: $4,014.36

The amount he invested in the beginning can be determined by tracing backwards the cost of 100 shares of
Vaniteux at the original price, and then finding what that amount would have been in U.S. dollars.

Original investment (cost) of 100 shares in Vaniteux in euros: € 1,725.00


Original investment (cost) of shares in U.S. dollars, calculated at original spot rate: $2,346.00

The rate of return on Spencer's investment, proceeds divided by initial investment: 71.12%
(Remember to subtract 1, the value of the initial investment, when calculating return.)

Alternatively, the total return which Spencer could earn if he sold his shares now, can be calculated by finding
compound rate of return of the change in the share price and the change in the value of the euro.

Percentage return = ( 1 + percent change in share price) x (1 + percent change in spot rate) - 1

Percentage return = ( 1 + .5264 ) x ( 1 + .0419 ) - 1 = 71.12%

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