George Robbins considers himself an aggressive investor. He's thinking about investing in some foreign securities and is looking at stocks in (1) Bayer AG, the big German chemical and health-care firm, and (2) Swisscom AG, the Swiss telecommunications company.
Bayer AG, which trades on the Frankfurt Exchange, is currently priced at
51.99
euros
(€)
per share. It pays annual dividends of
1.41
euro per share. Robbins expects the stock to climb to
61.04
euro per share over the next 12 months. The current exchange rate is
0.9008
€/U.S.
$, but that's expected to rise to
1.0052
€/U.S.
$. The other company, Swisscom, trades on the Zurich Exchange and is currently priced at
71.89
Swiss francs (Sf) per share. The stock pays annual dividends of
1.57
Sf per share. Its share price is expected to go up to
75.35
Sf within a year. At current exchange rates, 1 Sf is worth
$0.7397
U.S., but that's expected to go to
$0.8657
by the end of the 1-year holding period.
a. Ignoring the currency
effect,
which of the two stocks promises the higher total return (in its local currency)? Based on this information, which of the two stocks looks like the better investment?
b. Which of the two stocks has the better total return in U.S.
dollars?
Did currency exchange rates affect their returns in any way? Do you still want to stick with the same stock you selected in part
a?
Explain.
Answers:
a.)
Bayer= (61.04 + 1.41)/ 51.99 - 1 = 0.20119 = 20.12%
Swisscom= (75.35 + 1.57)/ 71.89 - 1 = 0.06996 = 6.99%
Bayer looks like better investment
b.)
Bayer= ((61.04 + 1.41) / 1.0052)/ (51.99 /0.9008)
- 1 = 0.0764 = 7.64%
Swisscom= (75.35 + 1.57) * 0.8657/ (71.89 *0.7397) - 1 = 0.2522 = 25.22%
Swisscom looks like better investment. Yes, the currency exchange rates did affect their returns. No, I would want the exact opposite of the stock I selected in part a.
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