Question

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 euro€ per share. Robbins expects the stock to climb to 60.00 euro€ per share over the next 12 months. The current exchange rate is 0.9025 euro€?/U.S$, but? that's expected to rise to 1.0150.euro€?/U.S$.

The other? company, Swisscom, trades on the Zurich Exchange and is currently priced at 71.50 Swiss francs? (Sf) per share. The stock pays annual dividends of 1.50 Sf per share. Its share price is expected to go up to 76.00 Sf within a year. At current exchange? rates, one Sf is worth $ 0.7500 U.S., but that's expected to go to $ 0.8500 by the end of the? 1-year holding period.

a. Ignoring the currency effect?, the holding period return for Bayer AG is ____%. (Round to two decimal? places.)

a. Ignoring the currency effect?, the holding period return for Swisscom AG is ____?%(Round to two decimal? places.)

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????(Select the best answer?below.)

A.

Bayer AG promises the higher total return. Based on total returns in foreign currency? form, Swisscom AG

is the better investment.

B.

Bayer AG promises the higher total return. Based on total returns in foreign currency? form, Bayer AG is the better investment.

C.

Swisscom AG promises the higher total return. Based on total returns in foreign currency? form, Bayer AG is the better investment.

D.

Swisscom AG promises the higher total return. Based on total returns in foreign currency? form, Swisscom AG is the better investment.

b. The total return in U.S. dollars for Bayer AG is ____?%.?(Round to two decimal? places.)

b. The total return in U.S. dollars for Swisscom AG is _____?% ?(Round to two decimal? places.)

Which of the two stocks has the better total return in U.S. dollars?? (Select the best answer? below.)

___?Bayer AG

____?Swisscom AG

Did currency exchange rates affect their returns in any? way??(Select the best answer? below.)

A.

Exchange rates yielded a higher total return on Bayer AG because the dollar depreciated relative to the Swiss franc.

B.

Exchange rates yielded a higher total return on Bayer AG because the dollar appreciated relative to the Swiss franc.

C.

Exchange rates yielded a higher total return on Swisscom AG because the dollar appreciated relative to the Swiss franc.

D.

Exchange rates yielded a higher total return on Swisscom AG because the dollar depreciated relative to the Swiss franc.

Do you still want to stick with the same stock you selected in part a?? Explain (Select the best answer below.)

A.

Exchange rates worked for the Bayer AG investment because the higher returns? (in local? currency) were complemented by a depreciation of the dollar relative to the euro. Select the stock issued by Bayer AG.

B.

Exchange rates worked against the Bayer AG investment because the higher returns? (in local?currency) were complemented by a depreciation of the dollar relative to the euro. Select the stock issued by Swisscom.

C.

Exchange rates worked against the Bayer AG investment because the higher returns? (in local?currency) were offset by an appreciation of the dollar relative to the euro. Select the stock issued by Swisscom.

D.

Exchange rates worked for the Bayer AG investment because the higher returns? (in local? currency) were offset by an appreciation of the dollar relative to the euro. Select the stock issued by Bayer AG.

Answer 1

a. Holding period return FOr Bayer AG = (Price at end of period-price at start+dividend)/price at start

= (60-53.25+1.5)/53.25 = 15.49%

Holding period return for Swisscom = (76-71.5+1.5)/71.5 = 8.39%

Bayer AG promises the higher total return. Based on total returns in foreign currency? form, Bayer AG is the better investment.

b. Total Return in US$

Bayer :

Cost = euro 53.25 / current exchange rate = 53.25 / 0.9025 euro = $59

PRice + div at end of year = Euro 60+1.5 = 61.5

COnverting to US $ = Euro 61.5 / expected exchange rate = 61.5/1.015 = 60.59

Total return = (60.59-59) / 59 = 2.7%

Swisscom

Purchase price in $ = 71.50 * 0.75 = $53.625

PRice in end ++ div = 76+1.5 = 77.5

in US$ = 77.5*0.85 = 65.875

Return = (65.875-53.625)/53.625 = 22.84%

Exchange rates yielded a higher total return on Swisscom AG because the dollar depreciated relative to the Swiss franc.

Exchange rates worked against the Bayer AG investment because the higher returns? (in local?currency) were offset by an appreciation of the dollar relative to the euro. Select the stock issued by Swisscom.