Response to the following problem:
George Robbins considers himself to be an aggressive investor. At the present time, he's thinking about investing in some foreign securities. In particular, he's looking at two shares:
(1) Bayer AG, the big German chemical and health-care company, and
(2) Swisscom AG, the Swiss telecommunications company
Bayer AG, which trades on the Frankfurt Exchange, is currently priced at 53.25 euros (A ) per share. It pays annual dividends of A 1.50 per share. Robbins expects the shares to climb to A 60.00 per share over the next 12 months. The current exchange rate is A 0.9025/A$, but that's expected to rise to A 1.015/A$. The other company, Swisscom, trades on the Zurich Exchange and is currently priced at 71.5 Swiss francs (Sf) per share. The share pays annual dividends of Sf 1.5 per share. Its share price is expected to go up to Sf 76.0 within a year. At current exchange rates, 1 Sf is worth A$0.75, but that's expected to go to A$0.85 by the end of the one-year holding period.
a. Ignoring the currency effect, which of the two shares promises the higher total return (in its local currency)? Based on this information, which of the two shares looks like the better investment?
b. Which of the two shares has the better total return in Australian dollars? Did currency exchange rates affect their returns in any way? Do you still want to stick with the same share you selected in part a? Explain.