Emerson Electric Case Essay.
Issuing debt in New Zealand is not necessary a nonstarter. Although it has a required coupon rate as high as 18.55%, the inflation rate has been floating freely and thus causing the CPI surprisingly high. Therefore, the purchasing power parity is proportional compare to the one in the United States or in Swiss. When paying out coupon, the high inflation rate has offset the high coupon rate. The cost of debt of New Zealand in its own currency is 4.6% in 1987/88(according to Government issued Treasury bill).
Therefore, in their own currency, to raise $65 million US dollars in New Zealand with a 2-year bond, the bond’s price should be 114.53. The first coupon payment is $21.2 in NZD, and the second payment would be the sum of second coupon payment plus the principle—135.7 million in NZD. The cost of debt in Switzerland is 4.0%. In the Swiss currency, $65 UDS converted to Swiss franc is 99.5 million in CHF.
The first coupon payment should be 4.5 million and the second payment is roughly about 104 million in CHF. If the company were to raise USD debt in the EURObond market, the first payment is 5.62million in USD and the second payment is $70.62 million.
However, if convert all the currencies back to USD, the results are different due to the interest rate difference in different countries. In New Zealand, the first coupon payment is 10.7million USD (by using CIP) which is different from 5.62million USD if the debt is issued in USD. Likewise, the second payment is to be 62 million USD which is less than the second payment if issued in USD. Therefore, the NPV of the debt if it is to be issued in New Zealand, would be 2 which is greater than if the debt is issued in USD, in which case the NPV would simply equal to 0. In CHF, the first payment made in CHF converted to USD would be 3.1 million USD. And the second payment would be equal to 0.33 million USD. In macroeconomics view, the forward rate depends on people’s expectancy about certain countries’ interest rates and inflation rate. In this case, New Zealand would be a better choice because, although its inflation rate has been floating high, there is a decreasing tendency throughout these years. The NPV is also positive and realizable.