BLADES, INC. CASE Decisions to Use International Financial Markets As a financial analyst for Blades, Inc., you are reason the U.S. manufacturing plant, located in Omaha, ably satisfied with Blades' current setup of exporting Nebraska. "Speedos" (roller blades) to Thailand. Due to the Ben Holt, Blades CFO, notices that Thailand's unique arrangement with Blades' primary customer in interest rates are approximately 15 percent (versus Thailand, forecasting the revenue to be generated there 8 percent in the United States). You interpret the is a relatively easy task. Specifically, your customer has high interest rates in Thailand as an indication of the agreed to purchase 180,000 pairs of Speedos annually, uncertainty resulting from Thailand's unstable econ- for a period of 3 years, at a price of THB4,594 (THB omy. Holt asks you to assess the feasibility of investing Thai baht) per pair. The current direct quotation of the Blades' excess funds from Thailand operations in Thai- dollar-baht exchange rate is $0.024. land at an interest rate of 15 percent. After you express The cost of goods sold incurred in Thailand (due to your opposition to his plan, Holt asks you to detail the imports of the rubber and plastic components from reasons in a detailed report. Thailand) runs at approximately THB2,871 per pair 1. One point of concern for you is that there is a of Speedos, but Blades currently only imports materi- als sufficient to manufacture about 72,000 pairs of trade-off between the higher interest rates in Thailand Speedos. Blades' primary reasons for using a Thai and the delayed conversion of baht into dollars. supplier are the high quality of the components and Explain what this means. the low cost, which has been facilitated by a continu- 2. If the net baht received from the Thailand opera- ing depreciation of the Thai baht against the U.S. dol- tion are invested in Thailand, how will U.S. operations be affected? (Assume that Blades is currently paying lar. If the dollar cost of buying components becomes more expensive in Thailand than in the United States, 10 percent on dollars borrowed and needs more financ- Blades is contemplating providing its U.S. supplier ing for its firm.) with the additional business. 3. Construct a spreadsheet to compare the cash Your plan is quite simple; Blades is currently using flows resulting from two plans. Under the first plan, its Thai-denominated revenues to cover the cost of net baht-denominated cash flows (received today) goods sold incurred there. During the last year, excess will be invested in Thailand at 15 percent for a revenue was converted to U.S. dollars at the prevailing 1-year period, after which the baht will be converted exchange rate. Although your cost of goods sold is not to dollars. The expected spot rate for the baht in 1 fixed contractually as the Thai revenues are, you year is about $.022 (Ben Holt's plan). Under the expect them to remain relatively constant in the near second plan, net baht-denominated cash flows are future. Consequently, the baht-denominated cash converted to dollars immediately and invested in inflows are fairly predictable each year because the the United States for 1 year at 8 percent. For this question, assume that Thai customer has committed to the purchase of all baht-denominated 180,000 pairs of Speedos at a fixed price. The excess cash flows are due today. Does Holt's plan seem dollar revenue resulting from the conversion of baht is superior in terms of dollar cash flows available after used either to support the U.S. production of Speedos 1 year? Compare the choice of investing the funds if needed or to invest in the United States. Specifically, versus using the funds to provide needed financing to the firm. the revenues are used to cover cost of goods sold in
