Problem:

A U.S. investor buys 100 shares of Heineken listed in Amsterdam for 40 euros. She goes through a U.S. broker, and the current exchange rate is 1 euro = 1.1 U.S. dollars. Her total cost is $4,400, or $44 per share of Heineken (40 Ã- 1.1 $ per €). Three months later, a gross dividend of €2 is paid (15 percent withholding tax), and she decides to sell the Heineken shares. Each share is now worth 38 euros, and the current exchange rate is 1 euro = 1.2 U.S. dollars because the euro has sharply risen against the dollar. The same exchange rate applied on the dividend payment date. There is a tax treaty between the US and Netherlands.

Required:

Question 1: What are the cash flows received in U.S. dollars?

Question 2: Assume that her personal U.S. tax rate is 20% on both capital gain and income. What is the net rate of return?

Explain comprehensively and provide step by step solution.