From the Skates'n'Stuff case study from Week 1 and the readings, predict the major effects of an expansion of Blades into Thailand based on the exposure to exchange rate risk for the company.

• Suggest whetherBlades should use the new required rate of return, which entails using the capital asset pricing model (CAPM) when discounting the cash flows from the Thai subsidiary to determine the net present value (NPV) of a project there.
• Provide a rationale for your response.

FromInternational Financial Management:

• Read Chapter 17 and 18 inInternational Financial Management.
• Jeff Madura

Blades, Inc. Case Use of Long-Term Financing Recall that Blades, Inc., is considering the establishment of a subsidiary in Thailand to manufacture Speedos, Blades' primary roller blades 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, Inc., the directors voted to establish a subsidiary in Thailand because of the relatively high level of control that strategy would afford Blades. The Thai subsidiary is expected to begin production by early next year, and the construction of the plant in Thailand and the purchase of the equipment necessary to manufacture Speedos are to commence immediately. Initial estimates of the plant and equipment required to establish the subsidiary in Bangkok indicate that costs will amount to approximately 550 million Thai baht. Because the current exchange rate of the baht is $0.023, this translates to a dollar cost of $12.65 million. Blades currently has $2.65 million available in cash to cover a portion of the costs, but it will have to obtain the remain-ing $10 million (434,782,609 baht) from other sources. The board of directors has asked Ben Holt, Blades' chief financial officer, to line up the necessary financ-ing to cover the remaining construction costs and purchase of equipment. Holt realizes that Blades is a relatively small company whose stock is not widely held. Furthermore, he believes that Blades' stock is currently undervalued because the company's expansion into Thailand has not been widely publicized at this point. For all these reasons, Holt would prefer debt to equity financing to raise the funds necessary to complete con-struction of the Thai plant. Holt has identified two alternatives for debt financing: issue the equivalent of $10 million yen-denominated notes or issue the equivalent of approxi-mately $10 million baht-denominated notes. Both types of notes would have a maturity of five years. In the fifth year, the face value of the notes will be repaid together with the last annual interest payment. Notes denomi-nated in yen () are available in increments of 125,000, whereas baht-denominated notes are issued in incre-ments of 50,000 baht. Because the baht-denominated notes are issued in increments of 50,000 baht (THB), Blades needs to issue THB434,782,609/50,000 8,6965 baht-denominated notes. Furthermore, because the cur-rent exchange rate of the yen in baht is THB0.347826/, Blades needs to obtain THB434,782,609/THB0.347826 = 1,250,000,313. Because yen-denominated notes would be issued in increments of 125,000 yen, Blades would have to issue 1,250,000,313/125,000 10,0005 yen-denominated notes. Due to recent unfavorable economic events in Thailand, expansion into Thailand is viewed as relatively risky; Holt's research indicates that Blades would have to offer a coupon rate of approximately10 percent on the yen-denominated notes to induce investors to purchase these notes. Blades could issue baht-denominated notes at a cou-pon rate of 15 percent. Whether Blades decides to issue baht-or yen-denominated notes, it would use the cash flows generated by the Thai subsidiary to pay the inter-est on the notes and to repay the principal in five years. For example, if Blades decides to issue yen-denominated notes, it would convert baht into yen to pay the interest on these notes and to repay the principal in five years. Although Blades can finance with a lower cou-pon rate by issuing yen-denominated notes, Holt suspects that the effective financing rate for the yen-denominated notes may actually be higher than that for the baht-denominated notes. Current forecasts for the future value of the yen indicate an appreciation of the yen (versus the baht) will occur 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: