ADR Workout
- 03:57
Use an example to calculate the number of ADRs issued and the value per ADR.
Glossary
ADR Depository ReceiptTranscript
In this workout, we are told that Tech Global, a Europe based multinational tech company, is considering expanding its investor base in the US Market. Tech Global currently has 10 million common shares and 2 million preferred shares outstanding in Europe. The common shares are trading at 20 Euro per share, and the preferred stock pays a fixed dividend rate of 4% on the par value of 25 Euro. The company is exploring ADRs as an alternative to a direct listing in the US.
We're then told that Tech Global decides to list ADRs that represent 1 10th of a common share each, but to list only 20% of its common shares in this manner. And we are asked to calculate the total number of ADRs that will be issued. So we need to start off with looking at how many common shares are currently outstanding and that is 10 million and we need to multiply that by 20% because we are told that they only plan to list 20% of the common shares as ADRs. Now, that is not the complete answer because we are told that the ADRs represent 1 10th of a common share. It's not a one-to-one ratio. It means one share is worth 10 ADRs. And so we need to multiply this by 10 to give us 20 million as the number of ADRs to be issued.
Next, we are told to assume a Euro dollar exchange rate of 1.09 and a common share price of 20 Euro. And we're asked at which price the ADRs should trade.
Starting point for this is to take the 20 Euro that the shares are currently trading at and convert that into US dollars because remember, the point of the ADRs is to have the shares effectively in dollars as opposed to Euro. So we need to multiply by that exchange rate of 1.09. But again, that is not the complete answer because that would be assuming a one to one ratio between the shares and ADRs. And we know that each ADR only represents 1 10th of a common share. And so it follows that the price of an A DR should be a 10th of the price of a common share. And so we need to divide By 10 to give us 2.18 as the price the ADRs should trade at. Finally, we are asked to evaluate the potential benefits and challenges of Tech Global using ADR to enter the US market, considering the company's international presence and US investors' perspective. Starting with the benefits access to a large investor base in the US and avoidance of direct compliance with US listing regulations ought to benefits.
Moving on to the challenges, possible perception issues if US investors are not familiar with the company and while the company doesn't have to comply with the direct listing requirements, they do have to comply with the SEC's rules for ADRs.