Emerson Electric Company Case Study Solution
Table 2: Net Cost to Raise Funds in Swiss Euro bond
| Years |
31-Dec-86 |
30-Jun-87 |
31-Dec-87 |
30-Jun-88 |
31-Dec-88 |
| Cash Flows (fund raised) |
$ 65,000,000 |
|
|
|
|
| Coupon Payment |
|
$ (1,500,329) |
$ (1,541,154) |
$ (1,573,262) |
$ (1,606,735) |
| Principle Repayment |
|
|
|
$ (70,163,121) |
| Total fund raised |
$ (1,500,329) |
$ (1,541,154) |
$ (1,573,262) |
$ (71,769,856) |
| Discounted Value |
$ (1,442,624) |
$ (1,424,884) |
$ (1,398,624) |
$ (61,349,174) |
| Net Cost to raise funds |
$ (615,306) |
|
Alternate 3:
Alternate 3 is a New Zealand Euro bond issue at the coupon rate of 18.55 percent. Table 3 shows the net cost to raise funds in New Zealand by using the assumed discount rate of 8 percent. The net cost for two year debt issue is 2,068,578 United States dollars at the end of the year 1986 by discounting back all the cash outflows and summing the present value of all cash inflows and outflows to get the final figure of the net cost to raise funds. Exhibit 3 of the document shows the calculations in New Zealand Euro bond but Table 3 is converted table in United States dollars by using the spot rate, 1 year forward and 2 year forward rate. These rates are shown in Exhibit 3.
Table 3: Net Cost to Raise Funds in New Zealand Euro bond
| Years |
31-Dec-86 |
30-Jun-87 |
31-Dec-87 |
30-Jun-88 |
31-Dec-88 |
| Cash Flows (fund raised) |
$ 65,000,000 |
|
|
|
|
| Coupon Payment |
|
$ (5,823,045) |
$ (5,568,725) |
$ (5,335,690) |
$ (5,121,376) |
| Principle Repayment |
|
|
|
$ (55,216,990) |
| Total fund raised |
$ (5,823,045) |
$ (5,568,725) |
$ (5,335,690) |
$ (60,338,366) |
| Discounted Value |
$ (5,599,081) |
$ (5,148,599) |
$ (4,743,409) |
$ (51,577,488) |
| Net Cost to raise funds |
$ (2,068,578) |
|
Conclusion:
By using the predictions of different available indicators, it has been concluded that the optimal investment choice is to issue two year debt in Swiss Euro bond (in Switzerland) to raise 65 million dollars at the coupon rate of 4.58 percent because it gives the lowest cost to raise funds in three available options.
Table 4: Alternatives Summary
| Bond Options |
Net Cost to raise funds |
| Domestic Issue |
$ (766,815) |
| Swiss Eurobond |
$ (615,306) |
| New Zealand Eurobond |
$ (2,068,578) |
Exhibit 1: United States
| Amount to be raised |
$ 65,000,000 |
| Coupon Rate |
8.65% |
| Semiannually Coupon Rate |
4.33% |
| Maturity |
2 Years |
| Discount rate (assumed) Half Year |
4% |
| Discount rate (assumed) |
8% |
Exhibit 2: Swiss Euro bond
| Amount to be raised |
$ 65,000,000 |
| Coupon Rate |
4.58% |
| Semiannually Coupon Rate |
2.29% |
| Maturity |
2 Years |
| Discount rate (assumed) Half Year |
4% |
| Discount rate (assumed) |
8% |
| Exchange rate June 1987 |
1.51 |
| Exchange rate June 1988 |
1.44 |
| Exchange rate Jan 1987 |
1.522 |
| Exchange rate Dec 1987 |
1.47 |
| Exchange rate Dec 1988 |
1.41 |
| Swiss Euro bond |
| Years |
31-Dec-86 |
30-Jun-87 |
31-Dec-87 |
30-Jun-88 |
31-Dec-88 |
| Cash Flows (fund raised) |
|
98,930,000 |
|
|
|
| Coupon Payment |
(2,265,497) |
(2,265,497) |
(2,265,497) |
(2,265,497) |
| Principle Repayment |
|
|
|
(98,930,000) |
| Total fund raised |
96,664,503 |
(2,265,497) |
(2,265,497) |
(101,195,497) |
Exhibit 3: Swiss Euro bond
| Amount to be raised |
$ 65,000,000 |
| Coupon Rate |
18.55% |
| Semiannually Coupon Rate |
9.28% |
| Maturity |
2 Years |
| Discount rate (assumed) |
8% |
| Discount rate (assumed) Half Year |
4% |
| Exchange rate June 1987 |
1.905 |
| Exchange rate June 1988 |
2.079 |
| Exchange rate Jan 1987 |
1.84 |
| Exchange rate Dec 1987 |
1.992 |
| Exchange rate Dec 1988 |
2.166 |
| New Zealand Euro bond |
| Years |
31-Dec-86 |
30-Jun-87 |
31-Dec-87 |
30-Jun-88 |
31-Dec-88 |
| Cash Flows (fund raised) |
|
119,600,000 |
|
|
|
| Coupon Payment |
(11,092,900) |
(11,092,900) |
(11,092,900) |
(11,092,900) |
| Principle Repayment |
|
|
|
(119,600,000) |
| Total fund raised |
108,507,100 |
(11,092,900) |
(11,092,900) |
(130,692,900) |
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