In: Business and Management

Submitted By qianzhiren
Words 596
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Emerson Electric Company
Over the past three years, Emerson Electric Co.’s international sales revenue has been satisfyingly increasing. At the same time, the company switched its strategy from exporting to offshore production. To finance the general corporate activities, Bousquette, CFO of the company, is considering raising $65 million by issuing two-year bonds. The three options that management has are 1) an 8.65% domestic bond, 2) a 4.58% Swiss Eurobond, 3) an 18.55% New Zealand Eurobond. In order to determine which debt issue will be the best choice for the company, economic forecasts for the three countries are reviewed. And I believe that the US bond would be the best choice among the three. The rationale behind this decision are illustrated as follows.
The NZ bond with an interest rate as high as 18.55% seems to be a nonstarter choice at first glance. However, it may not be the truth. The negative effect brought by the high coupon rate can be greatly offset by the high inflation rate when coupons are paid out. Thanks to the increasingly high inflation rate which will depreciate the value of NZ dollars, less US dollars will be actually needed to pay back the loan. Taking Purchasing Power Parity and International Interest Rate Parity into consideration, given such a high inflation rate (high depreciation of NZ dollars), it is hard to determine whether NZ is a bad choice or not.
To raise US$65 million, without taking the time value of money into account, Emerson will need to pay out about a total of US$76.25 million in the future two years (the first payment is $5,622,500 and the second payment is $70,622,500). To raise 98,930,000 CHF, the equivalence of US$65 million in Swiss currency, an approximate total of 108 million in CHF will be paid, which consists of the first coupon payment of 4,530,994 CHF and the second payment of 103,460,994 CHF. To raise…...

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