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CFA Level II Chartered Financial Analyst Questions 65–69 (page: 35)

Martin Hagemann, CFA, works for a large brokerage firm in Frankfurt, Germany. Hagemann has been hired by Tryssen AG, a global research-based company that is preparing to go public after a long history of operating privately. The need to raise substantial amounts of capital to fund research and development activities is seen as the key motivation for the change in policy. Tryssen is engaged in the discovery, development, manufacture, marketing, and sale of medical products.

Hagemann's first task is to recommend an exchange upon which Tryssen stock can be traded. One possibility is the Deutsche Bourse. The Deutsche Bourse operates primarily as a continuous order- driven system. Another alternative that Tryssen is considering is to list on a different exchange that operates as a price-driven system.

As an alternative, Tryssen may choose to list as an American Depository Receipt (ADR). ADRs are negotiable U.S. securities that usually represent a non-U.S. based company's publicly traded equity. Although typically denominated in U.S. dollars, depository receipts can also be denominated in euros. Depository receipts can be eligible to trade on all U.S. stock exchanges as well as on many European stock exchanges.

The increasing demand for depository receipts is driven by the desire of individual and institutional investors to diversify their portfolios, reduce risk and invest internationally in the most efficient manner possible. While most investors recognize the benefits of global diversification, there are many challenges presented when investing directly in local trading markets. Obstacles can include inefficient trade settlements, uncertain custody services, and costly currency conversions. Depository receipts overcome many of the inherent operational and custodial hurdles inherent in international investing. Tryssen has decided to access the U.S. market by involving itself in an ADR program. Tryssen has decided to save itself a lot of trouble, however, by not complying with SEC registration and reporting requirements.

As an alternative to ADRs, investors interested in increasing their exposure to international investments can choose to acquire exchange traded funds (ETFs). Hagemann researches the advantages and disadvantages of ETFs.

Execution costs are always a concern, and perhaps even more so for international investors. At the present time, Tryssen AG is most concerned with how reliably it can estimate trading costs. As part of the cost estimation process, Hagemann is asked to provide a report on the advantages and disadvantages of techniques used to reduce execution costs.

Trysse AG proceeds to list on the Frankfurt exchange, and a U.S. affiliate of Hagemann's company starts to aggressively promote the stock. A U.S. investor buys 200 shares of Tryssen at a price of €20 per share. At time of purchase, the exchange rate is €1 = $1.15. One month later Tryssen pays a dividend of €0.25 per share, and investors are subject to a withholding tax of 20%. The U.S. investor is eligible to claim a tax credit of $0.06 per share. At the time the dividend was paid, the shares had jumped to €24 each and the U.S. dollar had weakened to €1 = $ 1.20. The shares were sold just after the dividend was paid.

Which of the following represents a correct advantage and a correct disadvantage for the indicated approach that is aimed at reducing execution costs?

Martin Hagemann, CFA, works for a large brokerage firm in Frankfurt, Germany. Hagemann has been hired by Tryssen AG, a global research-based company that is preparing to go public after a long history of operating privately. The need to raise substantial amounts of capital to fund research and development activities is seen as the key motivation for the change in policy. Tryssen is engaged in the discovery, development, manufacture, marketing, and sale of medical products.

Hagemann's first task is to recommend an exchange upon which Tryssen stock can be traded. One possibility is the Deutsche Bourse. The Deutsche Bourse operates primarily as a continuous order- driven system. Another alternative that Tryssen is considering is to list on a different exchange that operates as a price-driven system.

As an alternative, Tryssen may choose to list as an American Depository Receipt (ADR). ADRs are negotiable U.S. securities that usually represent a non-U.S. based company's publicly traded equity. Although typically denominated in U.S. dollars, depository receipts can also be denominated in euros. Depository receipts can be eligible to trade on all U.S. stock exchanges as well as on many European stock exchanges.

The increasing demand for depository receipts is driven by the desire of individual and institutional investors to diversify their portfolios, reduce risk and invest internationally in the most efficient manner possible. While most investors recognize the benefits of global diversification, there are many challenges presented when investing directly in local trading markets. Obstacles can include inefficient trade settlements, uncertain custody services, and costly currency conversions.

Depository receipts overcome many of the inherent operational and custodial hurdles inherent in international investing. Tryssen has decided to access the U.S. market by involving itself in an ADR program. Tryssen has decided to save itself a lot of trouble, however, by not complying with SEC registration and reporting requirements.

As an alternative to ADRs, investors interested in increasing their exposure to international investments can choose to acquire exchange traded funds (ETFs). Hagemann researches the advantages and disadvantages of ETFs.

Execution costs are always a concern, and perhaps even more so for international investors. At the present time, Tryssen AG is most concerned with how reliably it can estimate trading costs. As part of the cost estimation process, Hagemann is asked to provide a report on the advantages and disadvantages of techniques used to reduce execution costs.

Trysse AG proceeds to list on the Frankfurt exchange, and a U.S. affiliate of Hagemann's company starts to aggressively promote the stock. A U.S. investor buys 200 shares of Tryssen at a price of €20 per share. At time of purchase, the exchange rate is €1 = $1.15. One month later Tryssen pays a dividend of €0.25 per share, and investors are subject to a withholding tax of 20%. The U.S. investor is eligible to claim a tax credit of $0.06 per share. At the time the dividend was paid, the shares had jumped to €24 each and the U.S. dollar had weakened to €1 = $ 1.20. The shares were sold just after the dividend was paid.

The capital gain for the U.S. investor in Tryssen stock and the dividend after adjusting for the withholding tax but before the tax credit are closest to:

Capital gain Adjusted dividend

Bryan Galloway is a strategist for JS Investments, a small money management firm. His goal is to analyze industries to determine whether there is justification for over- or under-weighting. His supervisor, Robyn Black, CFA, has asked that he document the process he uses to make his recommendations. However, just to be sure that Galloway understands industry analysis. Black asks him to provide examples of supply and demand analysis. Galloway makes the following two statements to prove that he understands the issue:

Statement 1: In analyzing supply in the tire and rubber industry, it is clear that the sale of each additional automobile will result in the sale of approximately two winter tires.

Statement 2: In analyzing demand for services in the healthcare industry, for every 100 new hospital beds required, 20 additional doctors are needed.

Black is not entirely confident in Galloway's abilities to analyze various industries, but decides to allow him to continue with his analysis.

Four of the largest holdings for JS Investments are a tobacco company, a soda drink company, an oil company, and a cable TV company. Black is worried that government intervention will have a serious impact on future growth for these companies and asks Galloway to further research each of the industries involved. However, just to make sure Galloway can handle this project. Black first asks him to review the basics of industry analysis.

In reviewing the factors affecting pricing considerations, Galloway concludes that all of the following are of direct importance:

Factor 1: Price changes in key supply inputs.
Factor 2: Product segmentation.
Factor 3: Ease of entry into the industry.
Factor 4: Degree of industry concentration.

Galloway also makes the following statements about the characteristics of the phases of the industrial life cycle:
Characteristic 1: Participants compete for market share in a stable industry.
Characteristic 2: Changing tastes have an important impact on the industry.
Characteristic 3: It is not clear that a product will be accepted in the industry.
Characteristic 4: Proper execution of strategy is critical.

Each of the phases is represented by one characteristic.
Which of the following choices best describes all the elements that Galloway should consider in doing an analysis of external factors in an industry analysis?

Bryan Galloway is a strategist for JS Investments, a small money management firm. His goal is to analyze industries to determine whether there is justification for over- or under-weighting. His supervisor, Robyn Black, CFA, has asked that he document the process he uses to make his recommendations. However, just to be sure that Galloway understands industry analysis. Black asks him to provide examples of supply and demand analysis. Galloway makes the following two statements to prove that he understands the issue:

Statement 1: In analyzing supply in the tire and rubber industry, it is clear that the sale of each additional automobile will result in the sale of approximately two winter tires.
Statement 2: In analyzing demand for services in the healthcare industry, for every 100 new hospital beds required, 20 additional doctors are needed.

Black is not entirely confident in Galloway's abilities to analyze various industries, but decides to allow him to continue with his analysis.

Four of the largest holdings for JS Investments are a tobacco company, a soda drink company, an oil company, and a cable TV company. Black is worried that government intervention will have a serious impact on future growth for these companies and asks Galloway to further research each of the industries involved. However, just to make sure Galloway can handle this project. Black first asks him to review the basics of industry analysis.

In reviewing the factors affecting pricing considerations, Galloway concludes that all of the following are of direct importance:
Factor 1: Price changes in key supply inputs.
Factor 2: Product segmentation.
Factor 3: Ease of entry into the industry.
Factor 4: Degree of industry concentration.

Galloway also makes the following statements about the characteristics of the phases of the industrial life cycle:
Characteristic 1: Participants compete for market share in a stable industry.
Characteristic 2: Changing tastes have an important impact on the industry.
Characteristic 3: It is not clear that a product will be accepted in the industry.
Characteristic 4: Proper execution of strategy is critical.
Each of the phases is represented by one characteristic.

Excluding external factors, industry analysis is best described as including:

Bryan Galloway is a strategist for JS Investments, a small money management firm. His goal is to analyze industries to determine whether there is justification for over- or under-weighting. His supervisor, Robyn Black, CFA, has asked that he document the process he uses to make his recommendations. However, just to be sure that Galloway understands industry analysis. Black asks him to provide examples of supply and demand analysis. Galloway makes the following two statements to prove that he understands the issue:

Statement 1: In analyzing supply in the tire and rubber industry, it is clear that the sale of each additional automobile will result in the sale of approximately two winter tires.
Statement 2: In analyzing demand for services in the healthcare industry, for every 100 new hospital beds required, 20 additional doctors are needed.

Black is not entirely confident in Galloway's abilities to analyze various industries, but decides to allow him to continue with his analysis.

Four of the largest holdings for JS Investments are a tobacco company, a soda drink company, an oil company, and a cable TV company. Black is worried that government intervention will have a serious impact on future growth for these companies and asks Galloway to further research each of the industries involved. However, just to make sure Galloway can handle this project. Black first asks him to review the basics of industry analysis.

In reviewing the factors affecting pricing considerations, Galloway concludes that all of the following are of direct importance:
Factor 1: Price changes in key supply inputs.
Factor 2: Product segmentation.
Factor 3: Ease of entry into the industry.
Factor 4: Degree of industry concentration.

Galloway also makes the following statements about the characteristics of the phases of the industrial life cycle:
Characteristic 1: Participants compete for market share in a stable industry.
Characteristic 2: Changing tastes have an important impact on the industry.
Characteristic 3: It is not clear that a product will be accepted in the industry.
Characteristic 4: Proper execution of strategy is critical.

Each of the phases is represented by one characteristic.
Are the two statements regarding supply and demand analysis correct or incorrect?