If someone could share a easy way out for this quesion? I kept beating round the bush and finally got the correct answer, Now in search of a step-by-step formal and a more mechanical way of sloving this problem in 3 mins. Please help! I don’t remember anything of Equities to derive a easy way out for this one. Q.Suppose a U.S. investor buys 100 shares of SAP Systems (SAP) listed in Germany on the XETRA, quoted at EUR14.5 per share (including commissions) for a total trade cost of EUR1,450. The exchange rate is one EUR = USD0.90. The U.S. currency cost is USD1,305 for the entire trade, including commissions charged by the U.S. broker. Three months later a one-euro dividend is paid for each share owned. Dividends are subject to a 15% withholding tax in Germany, and 28% tax on short-term capital gains and dividends in the U.S. At this point, the investor decides to sell the 100 shares of SAP now worth EUR16. The current exchange rate is now one EUR = USD0.95. Calculate the impact of taxes on the total return A. 7.6% B. 6.7% C. 23.8% D. 17.1%
Eek. These are one of those questions that suck. With these I’m usually able to back into the number somehow. Hopefully they won’t be on the exam. By the way Dinesh…YOU"RE WELCOME.
is the answer B?
dinesh this is how I think about it cost 1305$ proceeds $ 1600*0.95=$215 dividends 100* 0.95=$95 notes 1. witholding tax does not matter because it will be offset when you pay tax in us 2. you use a tax rate of 28% for div and cap gains tax payable = 310*28%=86.8 86.8/1305=6.65%
b is tax impact c is gross return d is net return.
points to remember: capital gains is paid only in the country where the investor resides. you get a tax credit in your home country for the tax withheld by the country where you have invested. while converting currencies: remember you always buy dear and sell cheap (the dealers needs to make money from the spread) i still am not very sure about what happens to tax exempt investors. do they have to claim the tax credit or do they not get taxed by the foreign govt in the first place?
Thanks florinpop at al. Every reply seems to add value and florinpop is right-on with each reply to this question. Good work