Bilal Hussain Asad
Emersion Electric Company Case
Emerson Electric has been showing a notable growth in its international sales over the past three years. The company has over this period, therefore, shifted its focus from exports towards offshore production; increasing offshore plants from 50 to 82. To keep this trend going, W.F. Bousquette, Emerson Electric Company’s Chief financial officer has to develop a plan to raise $65 million to meet Emerson’s general corporate needs. The management of the company believes that Asia has the most potential for future sales growth, and perhaps plans to open new plants close somewhere as well. Previously, the company required mostly short term loans which it borrowed in the local ...view middle of the document...
e. a higher inflation rate would cause the country’s currency (NZ$) to depreciate, thus reducing the amount of US$ needed to buy NZ$ to pay back the loan. Before, nonetheless, we come to any conclusion, we must consider the costs of debt and certain macroeconomic factors that could influence forward exchange rates.
To raise $65 million in Swiss francs, the first coupon payment with a rate of 4.58% would be about 4.53 million CHF and the second payment (sum of coupon payment and principle) about 103.5 million CHF, amounting to 108 million CHF in total. In New Zealand and United states, the total cost in their own respective currencies is estimated to be around 163.97 million NZ$ and 76.25 million USD respectively. To make a fair comparison, the costs of the bonds must be converted to a comparable unit of currency. In USD terms, bonds issued in Switzerland would cost $76.48 million and in New Zealand about $76.58 million (estimated using the exchange rates given in Exhibits 6 and 7). Therefore, it seems like issuing debt in USD would be the cheapest option.
If we look at the macroeconomic situation in Switzerland, the inflation is low as the government has been trying to keep the growth of monetary base in check. The forward exchange rates, as a result, are showing a declining trend as opposed to what we saw in case of New Zealand above. Out of the three currencies, USD however seems to be the safest option. The 0.3% tax on Swiss bonds and lower Forward rates could also further increase the cost of debt; and in case of the Kiwi economy, there seems to be a lot of uncertainty. Therefore, I think Emerson Electric should issue its debt in US dollars.