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As a financialanalyst for Blades, Inc., you are reasonably satisfied with Blades’ currentsetup of exporting “Speedos” (Roller blades) to Thailand. Due to the uniquearrangement with Blades’ primary customer in Thailand, forecasting the revenueto be generated there is a relatively easy task. Specifically, your customerhas agreed to purchase 180,000 pairs of Speedos annually, for a period of threeyears, at a price of THB4,594 (THB=Thai baht) per pair. The current directquotation of the dollar-baht exchange rate is $0.024.
The cost of goodssold incurred in Thailand (due to imports of the rubber and plastic componentsfrom Thailand) runs at approximately THB2,871 per pair of Speedos, but Bladescurrently only imports materials sufficient to manufacture about 72,000 pairsof Speedos. Blades’ primary reasons for using a Thai supplier are the highquality of the components and the low cost, which has been facilitated by a continuingdepreciation of the Thai baht against the U.S. Dollar. If the dollar cost ofbuying components becomes more expensive in Thailandthan in the United States,Blades is contemplating providing its U.S. supplier with the additionalbusiness.
Your plan is quitesimple; Blades is currently using its Thai denominated revenues to cover thecost of goods sold incurred there. During the last year, excess revenue was convertedto U.S. Dollars at the prevailing exchange rate. Although your cost of goodssold is not fixed contractually as the Thai revenues are, you expect them toremain relatively constant in the near future. Consequently, thebaht-denominated cash inflows are fairly predictable each year because the Thaicustomer has committed to the purchase of 180,000 pairs of Speedos at a fixedprice. The excess dollar revenue resulting from the conversion of baht is usedeither to support the U.S.production of Speedos if needed or to invest in the United. States. Specificallythe 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’sinterest rates are approximately 15 percent (versus 8 percent in the United States).You interpret the high interest rated in Thailandas an indication of the uncertainty resulting from Thailand’s unstable economy. Holtasks you to assess the feasibility of investing Blades’ excess funds from Thailand operations in Thailand at aninterest rate of 15 percent. After you express your opposition to his plan, Holtasks you to detail the reasons in a detailed report.
1. One point of concern for you is that thereis a tradeoff between the higher interest rates in Thailand and the delayed conversionof baht into dollars. Explain what this means.
2. If the net baht received form the Thailandoperation are invested in Thailand, how will U.S. operations be affected?(Assume that Blades is currently paying 10 percent on dollars borrowed and deedsmore financing for its firm.)
3. Construct a spreadsheet to compare the cashflows resulting from two plans. Under the first plan, net baht-denominated cashflows (received today) will be invested in Thailand at 15 percent for aone-year period, after which the baht will be converted to dollars. Theexpected spot rate for the baht in one year is about $0.022 (Ben Holt’s plan).Under the second plan, net baht-denominated cash flows are converted to dollarsimmediately and invested in the United States for one year at 8 percent. For thisquestion, assume that all baht-denominated cash flows are due today. Does Holt’splan seem superior in terms of dollar cash flows available after one year?Compare the choice of investing the funds versus using the funds to provideneeded financing to the firm( a spreadsheet is not needed).
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