7/28/2019 Assignment Int Fin

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Ch3

1.

One point of concern for you is that there is a tradeoff between higher

interest rates in Thailand and the delayed conversion of Baht intodollars. Explain what this means?ANSWER: If the net baht-denominated cash flows are converted into dollars today,Blades is not subject to any future depreciation of the baht that would result in less dollarcash flows.

2.

If the net Baht received from the Thailand operations are invested in

Thailand, how will US operations be affected? (Assume that Blades is

currently paying 10% on dollar borrowed and needs more financing for

its firm)ANSWER: If the cash flows generated in Thailand are all used to support U.S.operations, then Blades will have to borrow additional funds in the U.S. (or theinternational money market) at an interest rate of 10 percent. For example, if the bahtwill depreciate by 10 percent over the next year, the Thai investment will render a yieldof roughly 5 percent, while the company pays 10 percent interest on funds borrowed inthe U.S. Since the funds could have been converted into dollars immediately and used inthe U.S., the baht should probably be converted into dollars today to forgo the additional(expected) interest expenses that would be incurred from this action.

3.

Costruct a spreadshhet to compare the cash flows rsulting from 2

plans.For this question assume that allaa baht denominated cash flows

are due today.compare the choice of investing the funds versus using

the funds to provide needed financing to the firm?ANSWER: (See spreadsheet attached.) If Blades can borrow funds at an interest ratebelow 8percent, it should invest the excess funds generated in Thailand at 8 percent and borrowfunds atthe lower interest rate. If, however, Blades can borrow funds at an interest rate above 8percent(as is currently the case with an interest rate of 10 percent), Blades should use the excessfunds

generated in Thailand to support its operations rather than borrowing.Plan 1Ben Holt's PlanCalculation of baht-denominated revenue:Price per pair of "Speedos" 4,594

7/28/2019 Assignment Int Fin

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Pairs of "Speedos" 180,000= Baht-denominated revenue 826,920,000Calculation of baht-denominated cost of goods sold:Cost of goods sold per pair of "Speedos" 2,871 Pairs of "Speedos" 72,000

= Baht-

denominated expenses 206,712,000

Calculation of dollar receipts due to conversion of baht into dollars:Net baht-denominated cash flows now (826,920,000206,712,000) 620,208,000

AdChoicesInterest earned on baht over a one-year period (15%) 93,031,200Baht to be converted in one year 713,239,200 Expected spot rate of baht in one year $ 0.022= Expected dollar receipts in one year $ 15,691,262

Plan 2

Immediate ConversionCalculation of baht-denominated revenue:Price per pair of "Speedos" 4,594 Pairs of "Speedos" 180,000= Baht-denominated revenue 826,920,000Calculation of baht-denominated cost of goods sold:Cost of goods sold per pair of "Speedos" 2,871 Pairs of "Speedos" 72,000= Baht-denominated expenses 206,712,000Calculation of dollar receipts due to conversion of baht into dollars:Net baht-denominated cash flows to be converted (826,920,000206,712,000) 620,208,000 Spot rate of baht now $ 0.024= Dollar receipts now $ 14,884,992Interest earned on dollars over a one-year period (8%) 1,190,799= Dollar receipts in one year $ 16,075,791Calculation of dollar difference between the two plans:Plan 1 $ 15,691,262Plan 2 16,075,791Dollar difference $ (384,529)Thus, the cash flow generated in one year by Plan 1 exceed those generated by Plan 2 by

approximately $384,529. Therefore, Ben Holt's plan should not be implemented