Speedos" (roller blades) to Thailand. Due to the ■nique arrangement with Blades' primary customer in Thailand, forecasting the revenue to be generated there s a relatively easy task. Specifically, your customer has Its goods sold in- revenue was c exchange rate fixed contract
Speedos" (roller blades) to Thailand. Due to the ■nique arrangement with Blades' primary customer in Thailand, forecasting the revenue to be generated there s a relatively easy task. Specifically, your customer has Its goods sold in- revenue was c exchange rate fixed contract
Chapter22: International Financial Management
Section: Chapter Questions
Problem 9P
Related questions
Question
From the case study, only respond to question #3
Transcribed Image Text:BLADES, INC. CASE
Decisions to Use International Financial Markets
As a financial analyst for Blades, Inc., you are reason-
ably satisfied with Blades' current setup of exporting
"Speedos" (roller blades) to Thailand. Due to the
unique arrangement with Blades' primary customer in
Thailand, forecasting the revenue to be generated there
is a relatively easy task. Specifically, your customer has
agreed to purchase 180,000 pairs of Speedos annually,
for a period of 3 years, at a price of THB4,594 (THB =
Thai baht) per pair. The current direct quotation of the
dollar-baht exchange rate is $.024.
The cost of goods sold incurred in Thailand (due to
imports of the rubber and plastic components from
Thailand) runs at approximately THB2,871 per pair
of Speedos, but Blades currently only imports materials
sufficient to manufacture about 72,000 pairs of
Speedos. Blades' primary reasons for using a Thai sup-
plier are the high quality of the components and the
low cost, which has been facilitated by a continuing
depreciation of the Thai baht against the U.S. dollar.
If the dollar cost of buying components becomes
more expensive in Thailand than in the United States,
Blades is contemplating providing its U.S. supplier with
the additional business.
Your plan is quite simple; Blades is currently using
its Thai-denominated revenues to cover the cost of
goods sold incurred there. During the last year, excess
revenue was converted to U.S. dollars at the prevailing
exchange rate. Although your cost of goods sold is not
fixed contractually as the Thai revenues are, you expect
them to remain relatively constant in the near future.
Consequently, the baht-denominated cash inflows are
fairly predictable each year because the Thai customer
has committed to the purchase of 180,000 pairs of
Speedos at a fixed price. The excess dollar revenue
resulting from the conversion of baht is used either to
support the U.S. production of Speedos if needed or to
invest in the United States. Specifically, the revenues
are used to cover cost of goods sold in the U.S.
manufacturing plant, located in Omaha, Nebraska.
Ben Holt, Blades' CFO, notices that Thailand's
interest rates are approximately 15 percent (versus
8 percent in the United States). You interpret the
high interest rates in Thailand as an indication of the
uncertainty resulting from Thailand's unstable econ-
omy. Holt asks you to assess the feasibility of investing
Blades' excess funds from Thailand operations in Thai-
land at an interest rate of 15 percent. After you express
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
your opposition to his plan, Holt asks you to detail the
reasons in a detailed report.
1. One point of concern for you is that there is a
trade-off between the higher interest rates in Thailand
and the delayed conversion of baht into dollars.
Explain what this means.
2. If the net baht received from the Thailand opera-
tion are invested in Thailand, how will U.S. operations
be affected? (Assume that Blades is currently paying
10 percent on dollars borrowed and needs more
financing for its firm.)
3. Construct a spreadsheet to compare the cash flows
resulting from two plans. Under the first plan, net
Chapter 3: International Financial Markets 93
baht-denominated cash flows (received today) will be
invested in Thailand at 15 percent for a 1-year period,
after which the baht will be converted to dollars. The
expected spot rate for the baht in 1 year is about $.022
(Ben Holt's plan). Under the second plan, net baht-
denominated cash flows are converted to dollars
immediately and invested in the United States for
1 year at 8 percent. For this question, assume that all
baht-denominated cash flows are due today. Does
Holt's plan seem superior in terms of dollar cash flows
available after 1 year? Compare the choice of investing
the funds versus using the funds to provide needed
financing to the firm.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT