Question

Blades, Inc. Case Decisions to Use International Financial Markets As a financial analyst for Blades, Inc., you are reasonably 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 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 supplier 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 economy. Holt asks you to assess the feasibility of investing Blades’ excess funds from Thailand operations in Thailand at an interest rate of 15 percent. After you express your opposition to his plan, Holt asks you to detail the reasons in a detailed report.

1.)Construct a spreadsheet to compare the cash flows resulting from two plans. Under the first plan, net 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.

Answer 1

Sol:

		Specifications
Period of Purchase	3	(Years)
Quantity Purchased	180000	(Pairs)
Price THB	4594	(Per Pair)
Exchange Rate(dollar-baht)	0.24
COGS Thiland THB	2871	(Per Pair)
Current Import material amount	72000	(Pairs)

Forecasts:

		Year0	Year1	Year2
Forecasts
Revenue(THB)		826920000	826920000	826920000
Revenue ($)		198460800	198460800	198460800
Exchange Rate(dollar-baht)		0.24	0.24	0.24
COGS Thiland THB per pair		2871	2871	2871
Current Import material amount		72000	72000	72000
COGS(THB)		206712000	206712000	206712000
COGS($)		49610880
Gross Profit(THB)		620208000	620208000	620208000
Gross Profit($)		148849920	198460800	198460800

PLAN 1	Year0	Year1	Year2	Year3
TBH Cash Flow	620208000	713239200
TBH Interest Rate	15%	15%	15%	15%
Spot exchange price		0.22
Cash flow ($)		156912624

PLAN 2	Year0	Year1	Year2	Year3
TBH Cash Flow	620208000
Spot exchange price	0.24
Cash Flow ($)	148849920	160757914
$ Interest Rate	8%

Yes Plan 2 is superior in terms of dollar cash flow received since the value generated in PLAN 2 is greater than the value generated in PLAN 1 which is made in green colours.