Reading 36: Equity: Markets and Instruments-LOS e 习题精选 office, company, supplied, center, 2011

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Session 10: Equity Valuation: Valuation Concepts
Reading 36: Equity: Markets and Instruments

LOS e: Describe an American Depositary Receipt (ADR), and differentiate among the various forms of ADRs in terms of trading and information supplied by the listed company.

 

 

Harvey Wellington manages the London office for Samson Securities, a large investment bank based in New York. Wellington is working with several clients in Great Britain and Continental Europe who want to increase the appeal of their shares to U.S. investors.

Two clients in particular, a German staffing firm called Werk Corp. and a British maker of medical-supplies called Sussex Sutures, are in a hurry to reach the U.S. market. Wellington considers some characteristics of both companies before making his recommendation.

Werk Corp.

• Seeks higher visibility in the U.S.
• Worried about U.S. perception of the euro.
• Has little cash to spend.
• Not prepared to meet U.S. accounting standards.

Sussex Sutures

• Wants to increase sales to U.S. customers.
• Needs ADR to raise capital for expansion.
• Prepared to meet U.S. accounting standards.
• Seeks to limit issuing costs.

While Wellington is considering how best to help Werk Corp., one of Samson’s institutional clients, Cleveland’s Carter-Worth Cogs, purchases 5,000 shares of Werk Corp. on the German exchange for 26.85 euros (

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Which of the following is most likely an advantage of American Depositary Receipts (ADRs)?

A) Benefits of international diversification and lower administration and duty costs.

B) Elimination of currency risk and higher administration and duty costs.

C) Relatively large number of ADRs available in the market and ability to eliminate currency risks.

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ADRs provide the benefit of international diversification at low cost. However, investors still face currency and economic risks.

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Which of the following types of American Depository Receipts (ADRs) offer the most latitude in registration and reporting requirements while also allowing the foreign corporation an easy and inexpensive way to gain exposure to American investors?

A) Level III.

B) Level I.

C) Level II.

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There are three different types of ADR issues:

• Level I: This is the most basic type of ADR, used by foreign companies that either don't qualify or don't wish to have their ADR listed on an exchange. Level I ADRs trade solely on the OTC market and are an easy and inexpensive way for a company to gauge interest for its securities in North America.  Level I company ADRs are not required to comply with SEC registration and reporting requirements.

• Level II: This type of ADR is listed on an exchange or quoted on any official U.S. stock exchange, including the NYSE and Nasdaq. Level II ADRs meet the registration requirements of the SEC but they also get higher visibility trading volume.

• Level III: These are the most prestigious of the three types, in which an issuer floats a public offering of ADRs on a U.S. exchange. Level III ADRs enable the issuer to raise capital and gain visibility in the U.S. financial markets.

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A major disadvantage of an American Depository Receipt (ADR) is that ADRs:

A) are highly illiquid trading instruments that have high transaction costs and market impact costs.

B) do not eliminate currency and economic risks associated with the foreign corporation.

C) are expensive to administer and do not represent a proportionate interest in the foreign corporation.

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The disadvantage of ADRs is that they do not eliminate the inherent currency and economic risks associated with the shares of a foreign country. The advantage of ADRs is that they save investors considerable money by reducing administration and duty costs on each transaction. Note that ADRs are liquid and that only Level II and III ADRs meet SEC registration requirements, Level I ADRs do not.

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Various forms of American Depositary Receipts (ADRs) differ in their registration requirements with the Securities and Exchange Commission (SEC) and where they trade. Which of the following statements best describes these differences?

A) Level II ADRs meet the strictest requirements of the SEC’s registration and reporting requirements and trade solely on the Over-The-Counter (OTC) market.

B) Level II ADRs meet the strictest requirements of the SEC’s registration and reporting requirements and trade on the New York Stock Exchange (NYSE) and NASDAQ exchanges.

C) Level I ADRs meet the strictest requirements of the SEC’s registration and reporting requirements and they trade on the New York Stock Exchange (NYSE).

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Level II ADRs meet the strictest requirements of the SEC’s registration and reporting requirements, and they trade on the NYSE and Nasdaq markets. Level I ADRs trade solely on the OTC market and do not comply with the SEC registration and reporting requirements.