Question

James K. Silber, an avid international investor, just sold a share of Nestlé, a Swiss firm, for 5F6.000. The shares were bought for SF 5,400 a year ago. The exchange rate is 5F0.97 per U.S, dollar now and was SF 1.00 per dollar a year ago. Mr. Silber received SF 120 as a cash dividend immediately before the share was sold. Compute the rate. of return on this investment in terms of U.S. dollars.

a) 17,64%
b) 25.76%
c) 13.33%
d) 16.84%

Answer 1

The rate of return on James K. Silber's investment, after converting the investment and proceeds to U.S. dollars considering exchange rate changes, and accounting for dividends, is 16.84%.

Step-by-step explanation:

Calculating the rate of return for James K. Silber's investment in Nestlé involves determining the capital gains and dividend income, then adjusting for the change in the exchange rate over a year. Initially, Silber bought the share at SF 5,400 and sold it at SF 6,000, also receiving a dividend of SF 120. The change in the exchange rate from SF 1.00 to SF 0.97 per U.S. dollar during this period impacts the calculation.

The total proceeds in Swiss Francs from the sale and the dividend are SF 6,000 + SF 120 = SF 6,120. To get the dollar value at the time of sale, we convert this sum using the current exchange rate: SF 6,120 / 0.97 = $6,309.28. Similarly, we need to calculate the initial investment in dollars, which is SF 5,400 / 1.00 = $5,400. Now, we can calculate the rate of return, which is the profit divided by the initial investment, and then multiplied by 100 to get a percentage. The profit is the proceeds minus the initial investment, in dollars: ($6,309.28 - $5,400) = $909.28.

The rate of return in U.S. dollars is therefore ($909.28 / $5,400) × 100 = 16.84%. Therefore, the correct answer is d) 16.84%%.