1 Given that Blades expects to use the cash flows generated by the Thai subsidiary to pay the interest and principal of the notes, would the effective financing cost of the baht-denominated notes be affected by exchange rate movements? Would the effective financing cost of the yen-denominated notes be affected by exchange rate movements?

How?

Recall that Blades plc is considering the establishment of a subsidiary in Thailand to manufacture ‘Speedos’, Blades’ primary roller blade product. Alternatively, Blades could acquire an existing manufacturer of roller blades in Thailand, Skates’n’Stuff. At the most recent meeting of the board of directors of Blades plc, the directors voted to establish a subsidiary in Thailand because of the relatively high level of control it would afford Blades.

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Although Blades can finance with a lower coupon rate by issuing yen-denominated notes, Ben Holt sus- pects that the effective financing rate for the yen- denominated notes may actually be higher than for the baht-denominated notes. This is because forecasts for the future value of the yen indicate an appreciation of the yen (versus the baht) in the future. Although the precise future value of the yen is uncertain, Holt has compiled the following probability distribution for the annual percentage change of the yen versus the baht: Annual % change in yen (versus the baht) Probability 0% 20% 2 50 3 30