Forward Exchange Rate:
The details regarding the forward rates are presented in the excel file attached as well as an exhibit at the end of this document. The forward rates are computed using the interest rate parity theory in which the forward rates are computed using the interest rate of two countries. Furthermore, the forward rates are also compounded for the ten years.
Cost of servicing the debt:
The total cost of servicing the debt in Euro if the debt is raised in Swiss Franc,it would be 447,697,369. If the bonds are issued in Euro, the total cost of servicing the debt would be 393,750,000. On the other hand, the total cost of debt service if the bonds are issued in USD would be 448,272,005 and lastly the cost of debt service would be approximately 348,501,556.
It can be said that the cheapest and effective currency in which Carrefour should have to issue debt is British Pound, the overall cost of raising the finance would be minimal. The cost of issuing the bond is substantially lower in British Pound as compared to the other currencies especially with Swiss Franc and USD.
Carrefour S.A. Harvard Case Solution & Analysis
IRR:
If the bonds are issued in Swiss Franc, the IRR would be 16%, the IRR would be 90% if the debt is issued in Euros. On the other hand, the IRR would be approximately 67% if the bonds are issued in USD and if the bonds are issued in British Pounds the IRR would be highest about 115%. Again by looking at the IRR, it is recommended that the Carrefour should have to issue the bonds in British Pound.
Exhibits:
Forward rate | ||||
Year | Euro | British Pound | Swiss Franc | USD |
1 | 1.0000 | 1.5816 | 0.7043 | 1.0341 |
2 | 1.0000 | 1.5694 | 0.7188 | 1.0447 |
3 | 1.0000 | 1.5575 | 0.7324 | 1.0515 |
4 | 1.0000 | 1.5464 | 0.7456 | 1.0558 |
5 | 1.0000 | 1.5367 | 0.7586 | 1.0580 |
6 | 1.0000 | 1.5285 | 0.7714 | 1.0587 |
7 | 1.0000 | 1.5216 | 0.7841 | 1.0582 |
8 | 1.0000 | 1.5158 | 0.7967 | 1.0566 |
9 | 1.0000 | 1.5109 | 0.8092 | 1.0542 |
10 | 1.0000 | 1.5068 | 0.8216 | 1.0509 |
Issuance of bonds in Swiss Franc | ||||
Year | Principle | Interest | Principle (Euro) | Interest (Euro) |
0 | 1,090,116,279 | 750,000,000 | ||
1 | - | 39,516,715 | - | 27,829,700 |
2 | - | 39,516,715 | - | 28,405,049 |
3 | - | 39,516,715 | - | 28,943,669 |
4 | - | 39,516,715 | - | 29,464,498 |
5 | - | 39,516,715 | - | 29,976,799 |
6 | - | 39,516,715 | - | 30,483,399 |
7 | - | 39,516,715 | - | 30,985,433 |
8 | - | 39,516,715 | - | 31,483,817 |
9 | - | 39,516,715 | - | 31,977,812 |
10 | - | 39,516,715 | - | 32,468,358 |
Total | 1,090,116,279 | 395,167,151 | 895,678,833.39 | 302,018,535 |
Loan amount at forward rate | 895,678,833 | |||
Interest payments | 302,018,535 | |||
Loan amount at spot rate | 750,000,000 | |||
Total Bond Payment | 447,697,369 |
Issuance of bonds in Euro | ||
Year | Principle | Interest |
0 | 750,000,000 | |
1 | - | 39,375,000 |
2 | - | 39,375,000 |
3 | - | 39,375,000 |
4 | - | 39,375,000 |
5 | - | 39,375,000 |
6 | - | 39,375,000 |
7 | - | 39,375,000 |
8 | - | 39,375,000 |
9 | - | 39,375,000 |
10 | - | 39,375,000 |
Total | 750,000,000 | 393,750,000 |
Loan amount at forward rate | 750,000,000 | |
Interest payments | 393,750,000 | |
Loan amount at spot rate | 750,000,000 | |
Total Bond Payment | 393,750,000 |
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