MINICASE      
.      ,	-.-    ;'.,.<.'	;   •	,	:.	'	.••.'..•..	.	.,:.'     '.:

Emerson Electric Company (Emerson) manufactures a broad range of electrical and electronic equipment. It has about 200 subsidiaries that operate in more than two dozen countries. Emerson is placing increased emphasis on its international operations. International sales have increased to more than 20% of its total. As part of its international strategy, Emerson has shifted from exporting domestically produced items to manufacturing goods offshore and has nearly doubled its number of foreign plants.
Emerson wants to raise $65 million (or the equivalent in a foreign currency) to finance its overseas expansion. Its debt is rated triple-A. Thus it should be able to borrow funds in virtually any market it chooses. Emerson's investment banker has presented several financing alternatives. These alternatives include three possible two-year debt issues, each with a bullet maturity:
1.	A domestic U.S. dollar issue bearing a coupon rate of
8.65% APR (with interest payable semiannually in
arrears)
2.	A Swiss franc-denominated Eurobond issue bearing
a coupon rate of 4.60% APR (with interest payable
annually in arrears)
3.	A domestic issue denominated in New Zealand dol
lars bearing a coupon rate of 18.55% APR (with
interest payable semiannually in arrears)
Emerson has subsidiaries operating in both Switzerland and New Zealand, and it realizes free cash flow in Swiss francs and New Zealand dollars. Nevertheless, it intends to hedge fully its currency risk exposure if it issues non-U.S. dollar debt. Its investment banker has said Emerson would be able to purchase Swiss francs and New Zealand dollars in the futures market at the following prices:

Months forward	6	12	18	24	
Swiss franc/US Dollar	1.510	1.470	1.440	1.410	
New Zealand dollar/US Dollar	1.905	1.992	2.079	2.166	
The spot foreign exchange rates are 1.530 Swiss francs per U.S. dollar and 1.762 New Zealand dollars per U.S. dollar.
QUESTIONS
1.	How would you explain the pattern of decreasing for
ward exchange rates for Swiss francs and the pattern of
increasing forward exchange rates for New Zealand
dollars? Explain why the Swiss franc issue may not be
the least expensive, and why the New Zealand dollar
issue ,may not be the most expensive, in spite of their
interest rates.
2.	what principal amount of foreign currency-denomi
nated bonds would Emerson have to issue to raise $65
million, assuming it issues bonds denominated in Swiss
francs or New Zealand dollars? Specify the debt-service
stream (principal and interest) for each alternative.
Express them in equivalent amounts of U.S. dollars.
3.	Calculate the cost of borrowing for each alternative.
Which has the lowest cost?
4.	Suppose the three debt issues require the following
flotation costs, which are tax-deductible in the United
States on a straight-line basis over the life of each issue:
1% for the Swiss franc issue, 0.75% for the New
Zealand dollar issue, and 0.50% for the U.S. dollar
issue. Assume a 40% income tax rate for Emerson.
Which has the lowest after-tax cost?
1.