Bilal Hussain Asad
BUAD 417
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 $65 million to meet Emerson’s general corporate needs. The management of the company believes that Asia has the most potential for future sales growth, and perhaps plans to open new plants close somewhere as well. Previously, the company required mostly short term loans which it borrowed in the local currency where the operations needed funding, but now it needs a more reliable currency to issue long-term debt in.
As high as the required New Zealand coupon rate of 18.55% is, it is not necessarily a nonstarter. The inflation in New Zealand “is high and is certain to go higher”. The high expected inflation and a freely floating New Zealand dollar (NZ$) means that the depreciation of NZ$ could result in a lower total cost of debt. The relative purchasing power parity implies that the inflation rate and exchange rate of NZ$ will move in proportion to each other i.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