Shift Ctrl Alt 4 Part 4: Long-Term Asset and Liability Management markets there. However, negotiations wis mercial banks in Thailand indicate that . a of the competitors in Thailand. At a recent meeting 15 board of directors, Holt presented his capital budgeting to borrow at interest rates of a anding into Thailand will diversity Blau As a result of this d ponted out that the establishment of d had a net present value (NPV) versus 8 percent in the United States of over $8 million even when a 25 percent return is used to discount the cash flows resulting tions. from the project. Blades board of directors, hile favorable to the idea of international expansion in the United States. Holt sees this as a this discount rale wa budgeting analysis and whether believes that Blades' probability of ban sh a suhsidiary in Thailand has been ary in Thailand, all of the 25 percent discount rate to dependent on the US. economy high enough. Consequently, the be reduced. Nevertheless, if Blades fclthe directors wondered since Blades' cash flows would no0r where Holt obtained the percent Blades establishes a subid remitted back to the U.S. parent, which delayed until the directors' meeting next month. level of exchange rate risk. This The directors also asked Holt to determine how oper highi ating a subsidiary in Thailand Blades that the baht will depreciate over already condu would affect Blades concern because current economicfPr d rate of return and its cost of capital. The direc Thailand i its cost of capital relative to roller blade country risk analysis for Thailand that resuha s operating solely in the United States, Fur unfavorable country risk rating tors would like to know how Blades' characteristics next few years. Furthermore, Holt has Regarding Blades' level of thermore, the capital asset pricing model (CAPM) was Blades systematic risk would be affected by atic risk, would be affected by the establishment espanding into Thailand. Another isue that was raised subsidiary in Thailand. He believes that Blades and equity in Thailand differ would drop from its current level of 2.0 to 1.8 be States and the firm's exposure to U.S. market conditions wou whether these differences would affect Blades' cost of reduced by its expansion into Thailand. Moreover estimates that the risk-free interest rate is 5 percent ed by two directors, who would like to know determined how Blades beta, which s how the cost of debt from the corresponding costs in the United the capital. The last issue that was raised during the meeting by expanding into Thaidand. The directors have asked was whether Blades capital structure would be affected the required return on the market is 12 percent. Holt has also determined that the costs of both Holt to conduct a thorough analysis of these issues and equity are higher in Thailand than in the U States. Lenders such as commercial banks in Tha Holt's knowiedge of cost of capital and capital struc require interest rates higher than US. rates. This ture decisions is somewhat limited, and he requires tially attributed to a higher risk premium, which re your help. You are a financial analyst for Blades, Inc. he larger degree of economic uncertainty in Tha Holt has gathered some information regarding Blades The cost of equity is also higher in Thailand thar 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 o ystematic risk, and the costs of debt and equity in nities are available to Thai investors, which increa and report back to them at their next meeting. Thailand, and he wants to know whether and how this pportunity cost. However, Holt is not sure th inforaton will afect Blades' cost of capital and its higher cost of equity in Thailand would affect Bl o capital structure decision. all of Blades' shareholders are located in the United Regarding Blades' characteristics Holt has gathered Holt has asked you to analyze this informati information regarding Blades' size, its access to the to determine how it may affect Blades' cost of Thai capital markets, its diversitication benefits from a Thai expansion, its exposure to exchange rate risk, and its exposure to country risk. Although Blades' expansion into Thailand classifies the company as an MNC, Blades and its capital structure. To help you in your a he would like you to provide answers to the fo questions: is still relatively small compared to other U.S. roller cost of capital will be higher or lower than t Also, Blades expansion into capital of roller blade manufacturers operating 1. If Blades expands into Thailand, do you thi blade manufacturers. Thailand will give it access to the capital and money 3. 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 Thailand? Why