As a financial analyst for Blades, Inc., you are reasonably satisfied with Blades current set-up of exporting Speedos (rollerblades) 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 three years, at a price of THB4594 (THB = Thai baht) per pair. The current direct quotation of the dollarbaht exchange rate is $0.024.

The cost of goods sold incurred in Thailand (due to imports of the rubber and plastic components from Thailand) runs at approximately THB2871 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 US dollar. If the US dollar cost of buying components becomes more expensive in Thailand than in the US, Blades is contemplating providing its US 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 US 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 US dollar revenue resulting from the conversion of baht is used either to support the US production of Speedos, if needed, or to invest in US. Specifically, the revenues are used to cover cost of goods sold in the US manufacturing plant.

Ben Holt, Blades CFO, notices that Thailands interest rates are approximately 15 per cent (versus 8 per cent in US). You interpret the high interest rates in Thailand as an indication of the uncertainty resulting from Thailands unstable economy. Holt asks you to assess the feasibility of investing Blades excess funds from operations in Thailand at an interest rate of 15 per cent. After you express your opposition to his plan, Holt asks you to put forward the reasons in a detailed report.

a. 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. Critically analysis this statement. (8 marks)

b. If the net baht received from Thailand operation are invested in Thailand, discuss 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). (17 marks)

c. 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 $0.022 (Ben Holts 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 Holts plan seem superior in terms of dollar cash flows available after 1 year? Compare and make the right decision between choices of investing the funds versus using the funds to provide needed financing to the firm.

(25 marks)