Question

Benjamin is an American investor seeking to evaluate an investment opportunity in Motorola Solutions Inc. On the other side of the globe, Desmond from Singapore is also contemplating the same choice. They have access to the following information in US dollar terms:
Table 2.1: Dividend Payout Schedule for Motorola Solutions Inc.
Both enter an investment worth 50 shares each from their respective countries on April 15, 2019 at a per share price of $141.44 and exit the market on March 12, 2020 at a price of $145.24. Benjamin falls in the ordinary income tax-bracket of 28% while Desmond’s foreign investment income is taxed at 15%. For their investment horizon the exchange rate has moved as follows:
Table 2.2: Exchange Rate Movements during Investment Horizon
Date Exchange Rate*
April 15, 2019
SGD1.35291/$
June 13, 2019
SGD1.3669/$
September 12, 2019
SGD1.37774/$
December 12, 2019
SGD1.35719/$
March 12, 2020
$0.71628/SGD
March 12,2020
$0.70514/SGD
* SGD: Singapore Dollar

Question 1
Compute the before-tax HPR and IRR for Benjamin based on USD earnings.

Question 2
Compute the afer-tax HPR and IRR for Benjamin based on USD earnings
page 5

Question 3
Repeat the exercises in Questions 1 and 2 above for Desmond in terms of Singapore Dollars.

Question 4
Do both investors earn the same HPR and IRR? Explain the role of exchange rates and FOREX risk in this context. Who faces this risk? Is the risk worth it in this scenario? If the HPR and IRR are different for both investors, can you deduce the rate at which the USD may have appreciated/depreciated over the investment horizon?

Answer 1

#1

Computation of before-tax HPR and IRR for Benjamin based on USD earnings.

HPR or Holding period return before tax = ((Ps-Pc)+ Interest or dividend) / Pc    * 100

where Ps= Selling price

Pc= Purchase cost

Date	Number of share purchased	price$	Toatal($)(no*price)
15th April 2019	50	$141.44	$7072 (Pc)
12th March 2020	50	$145.24	$7262 (Ps)
333 days

Total number of days of holding = 333 days

HPR = ( $7262-$7072) / $ 7072 *100 = 2.69%

IRR or Internal rate of return = Pc ( 1+IRR) = Ps

=> $7072 (1+ IRR) = $ 7262

=> IRR = 2.69%

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#2

Computation of AFTER-tax HPR and IRR for Benjamin based on USD earnings.

HPR or Holding period return AFTER tax = ((Ps net of tax-Pc)+ Interest or dividend) / Pc    * 100

where Ps= Selling price

Pc= Purchase cost

tax rate= 28 %

Total sales (Ps)	$7262
Total Purchase cost (Pc)	$7072
Net gain(Ps-Pc)	$190
Tax rate	28%
Tax on gain = $ 190*28%	$53.2
Net proceeds after tax (Ps after tax)	= $7262-53.2$ =$7208.8

HPR after tax = ($ 7208.8 - $ 7072) / $7072 * 100 = 1.93 %

IRR Calculation

= Pc (1+IRR)= Ps after tax

=>$7072 (1+IRR) = $7208.8

=>IRR=1.934%

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# 3.1

Computation of before-tax HPR and IRR for Desmond based on SGD earnings.

HPR or Holding period return before tax = ((Ps-Pc)+ Interest or dividend) / Pc    * 100

where Ps= Selling price

Pc= Purchase cost

Date	Number of share purchased	price$	Toatal($)(no*price)	Exchange rate	amount in SGD
15th April 2019	50	$141.44	$7072	SGD1.35291/$	=$7072* 1.35291 =SGD 9567.78 (Pc)
12th March 2020	50	$145.24	$7262 (Ps)	$0.70514/SGD	=$7262/0.70514 = SGD 10298.67 (Ps)
333 days

Before tax HPR = (SGD 10298.67- SGD 9567.78) / SGD 9567.78 = 7.64 %

IRR CALCULATION

= Pc (1+IRR) = Ps

=>SGD 9567.78(1+IRR) = SGD 10298.67

=>IRR = 7.64 %

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# 3.2

Computation of AFTER-tax HPR and IRR for Desmond based on SGDearnings.

HPR or Holding period return AFTER tax = ((Ps net of tax-Pc)+ Interest or dividend) / Pc    * 100

where Ps= Selling price

Pc= Purchase cost

tax rate= 15%

Total sales (Ps)	SGD 10298.67
Total Purchase cost (Pc)	SGD 9567.78
Net gain(Ps-Pc)	SGD 730.89
Tax rate	15%
Tax on gain = SGD 730.89*15%	SGD 109.63
Net proceeds after tax (Ps after tax)	= SGD 10298.67-SGD 109.63 =SGD 10189.04

HPR after tax = (SGD 10189.04 - SGD 9567.78) / SGD 9567.78 *100 = 6.49 %

IRR CALCULATION

= Pc (1+IRR) = Ps

=>SGD 9567.78(1+IRR) = SGD 10189.04

=>IRR = 6.49 %

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#4

-No, both the investors donot have the same IRR & HPR. This is because of the risk and returns involved in the foreign exchange market.

- Desmond has the foreign exchange risk. because the share are listed in the $ and the all the transactions are also in $. But Desmond has to convert the $ into SGD, Which creates forex risks.

- the risk take here by desmond is worth in the current situation as the IRR and HPR of desmond is far better that Benjimin.