or remained unchanged? Explain. BLADES, INC. CASE Assessment of Cost of Capital instructors) and search using ISBN 9781133947837 Decall that Blades has tentatively decided to establish a most economic forecasters, who predict a slow recovery in Thailand to manufacture roller blades, of the Thai economy, which has been very negativelry e new plant will be utilized to produce Speedos, affected by recent events in that country. Fu primary product. Once the subsidiary has cent events in that country. Furthermore, aht indicate that forecasts for the future value of the b the curre few years. Blades' been established in Thailand, it will be operated for 10 years, at which time it is expected to be sold. Ben ncy may continue to depreciate over the next Holt, Blades' chief financial officer, believes the growth Despite the pessimistic forecasts, Holt believes potential in Thailand will be extremely high over the Thailand is a good international target for Blades pro- next few years. However, his optimism is not shared by ducts because of the high growth potential and lack markets there. However, n mercial banks in Thailand indicate that B to borrow at interest rates of versus 8 percent in the United States, competitors in Thailand. At a recent meeting of the Holt presented his capital budgeting and pointed out that the establishment of a In Thailand had a net present value (NPV) of over $8 million even when a 25 percent required rate of return is used to discount the cash flows resulting approximately 15 perco xpanding into Thailand will diversi tions. As a result of this e subject to economic conditions in Th in the xpansion, Blades w woul from the project. Blades' board of directors, while favorable to the idea of international expansion, ailand United States. Holt sees this as a maion remained Specifically, the directors wondered since Blades' cash flows would no where Holt obtained the 25 percent discount rate to conduct his capital budgeting analysis and whether believes that Blades be ary in Thailand, all of the subsidiary's ear ubs this discount rate was high enough. Consequently, the sidiary in Thailand has been decision to establish a sub delayed until the directors' meeting next remitted back to the U.S. parent, which woukwill be high level of exchange rate risk. This is f Creale rs also asked in Thailand would affect Blades concern because current economic its cost of capital. The direc- Thailand indicate that the baht will d Holt to determine how oper- over tors would like to know how Blades characteristics next few years. risk analysis for Thailand that would affect its cost of capital relative to roller blade a country operating solely in the United States. Fur unfavorable country risk rating level of systematic risk Regarding Blades thermore, the capital asset pricing model (CAPM) was mentioned by two directors, who would like to know how Blades' beta, which n determined subsidiary in would drop from its current level of 2.0 to lades' systematic risk would be affected by atic risk, would be affected by t he establishme expanding into Thailand. Another issue that was raised Thailand. He believes that Blades how the cost of debt and equity in Thailand differ from the corresponding costs in the United States and capital. The last issue that was raised during the meeting by expanding into Thailand. The directors have asked ns would be rate is 5 percent and has also determined that the costs of both dsht the firm's exposure to whether these differences would affect Blades' cost of reduced by its expansion into Thailand. Moreover, Holb was whether Blades' capital structure would be affected the required return on the market is 12 percent. estimates that the risk-free interest Holt Holt to conduct a thorough analysis of these issues and equity are higher in Thailand than in the United Holt's knowledge of cost of capital and capital struc- require interest rates higher than U.S. rates. This is p and report back to them at their next meeting. States. Lenders such as commercial banks in Tha ture decisions is somewhat limited, and he requires ially attributed to a higher risk premium, which reflects your help. You are a financial analyst for Blades, Inc. the larger degree of economic uncertainty in Thailand Holt has gathered some information regarding Blades' The cost of equity is also higher in Thailand than in characteristics that distinguish it from roller blade United States. Thailand is not as developed as the U manufacturers operating solely in the United States, States in many ways, and various investment opportu its systematic risk, and the costs of debt and equity in nities are available to Thai investors, which increases the Thailand, and he wants to know whether and how this opportunity cost. However, Holt is not sure that ti ation will affect Blades' cost of capital and its higher cost of equity in Thailand would affect Blades,as capital structure decision all of Blades' shareholders are located in the United Stat Regarding Blades' characteristics, Holt has gathered Holt has asked you to analyze this informat information regarding Blades' size, its access to the to determine how it may affect Blades' cost of Thai capital markets, its diversification benefits from a and its capital structure. To help you in your Thai expansion, its expos its exposure to country risk. Although Blades' expansion questions: into Thailand classifies the company as an MNC, Blades capital he would like you to provide answers to the following ure to exchange rate risk, and is still relatively small compared to other U.S. roller 1. If Blades expands into Thailand, do you think it blade manufacturers. Also, Blades' expansion into cost of capital will be higher or lower than the cost of Thailand will give it access to the capital and money capital of roller blade manufacturers operating solely n tal? Why? 4. Given the high level of interest rates in Thailand, the high level of exchange rate risk, and the high (perceived) level of country risk, do you think Blades will be more or less likely to use debt in its capital structure as a result of its expansion into Thailan Why