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 53.25 euros per share. It pays annual dividends of 1.50 euros per share. Robbins expects the stock to climb to 60.00 euros per share over the next 12 months. The current exchange rate is 0.9025€/U.S.$, but that’s expected to rise to 1.015€/U.S.$. The other company, Swisscom, trades on the Zurich Exchange and is currently priced at 71.5 Swiss francs (Sf) per share. The stock pays annual dividends of 1.5 Sf per share. Its share price is expected to go up to 76.0 Sf within a year. At current exchange rates, one Sf is worth $0.75 U.S., but that’s expected to go to $0.85 by the end of the 1-year holding period.
a. Ignoring the currency effect, which of the 2 stocks promises the higher total return (in its local currency)? Based on this information, which looks like the better investment?
b. Which of the 2 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.