8/8/2019 Blades, Inc (2)

1/13

8/8/2019 Blades, Inc (2)

2/13

US based roller blade manufacturer Period of operation- 10 years

Speedos

NPV= $8 mn @ 25% (conservative approach) Total risk= Unsystematic + Systematic

IR (Thai)=15%, IR (US)= 8%

Rf= 5%, Rm=12% Cost of D and E higher in Thailand

8/8/2019 Blades, Inc (2)

3/13

South East Asian Financial Crisis- 1997-98 Recovery

Tourist-

1. High growth potential2. Lack of competitors

Volatile Bhat (Thiland Currency )

Systematic Risk equity risk ,interest rate risk ,commodity risk.

Unsystematic Risk-country risk(mutual fund,shares ,debenture) , exchange rate risk

8/8/2019 Blades, Inc (2)

4/13

Favorable- Default risk reduced

Unfavorable-

1. Smaller size than MNCs- wont receive

preferential treatment2. Higher interest rate in Thailand

3. Translation exposure

4. Country risk5. Unsystematic risk increases- diversified

8/8/2019 Blades, Inc (2)

5/13

When Beta=2, Ke= 19%

When Beta= 1.8, Ke= 17.6%

Expansion-> reduces systematic risk

Usage of 25% required ROR consideringunsystematic risk in Thailand

8/8/2019 Blades, Inc (2)

6/13

Combinations US cost of

debt= 8%

Thailand cost

of debt= 15%

US cost of

equity= 19%

Approximated

WACC

50% US debt50% US equity

50%*8%= 4% --------------------- 50%*19%=9.5%

13.5%

20% US debt30% Thai debt50% US equity

20%*8%= 1.6% 30%*15%=4.5%

50%*19%=9.5%

15.6%

50% US equity

50% Thai debt

--------------------- 50%*15%=

7.5%

50%*19%=9.5% 17%

40% Thai debt60% US equity

--------------------- 40%*15%= 6% 60%*19%=11.4%

17.4%

8/8/2019 Blades, Inc (2)

7/13

Combinations US cost of

debt= 8%

Thailand cost

of debt= 15%

US cost of

equity= 17.6%

Approximated

WACC

50% US debt50% US equity

50%*8%= 4% --------------------- 50%*17.6%=8.8%

12.8%

20% US debt30% Thai debt50% US equity

20%*8%= 1.6% 30%*15%=4.5%

50%*17.6%=8.8%

14.9%

50% US equity

50% Thai debt

--------------------- 50%*15%=

7.5%

50%*17.6%=

8.8%

16.3%

40% Thai debt60% US equity

--------------------- 40%*15%= 6% 60%*17.6%=10.56%

16.56%

8/8/2019 Blades, Inc (2)

8/13

Risk premium= 12%-5%= 7%

LowestWACC before investing in Thailand=13.5%

Required rate of return= (13.5+7)%= 20.5%

LowestWACC after investing in Thailand=12.8%

Required rate of return= (12.8+7)%= 19.8%

8/8/2019 Blades, Inc (2)

9/13

EXCESS RETURNON STOCK

EXCESS RETURNON MARKET PORTFOLIO

Beta < 1Beta < 1(defensive)(defensive)

Beta = 1Beta = 1

Beta > 1Beta > 1(aggressive)(aggressive)

Each characteristiccharacteristiclineline has a

different slope.

8/8/2019 Blades, Inc (2)

10/13

Option for Debt Financing- borrow dollar USmarket and convert it into bhatt or borrow bhattfrom Thai market.

Interest rate higher in Thailand than that in US International Fisher effect is applicable Higher cost of debt but will depriciate over the

year offseated by the reduce exposure toadverse exchange rate effect.(10 year projectand high political and currency risk)

Q4- Use of debt Advantages-1. High country risk- possibility for hedging2. Future depreciation->increase profit of company Disadvantage-1. Increase in cost of capital

Option for Debt Financing- borrow dollar USmarket and convert it into bhatt or borrow bhattfrom Thai market.

Interest rate higher in Thailand than that in US International Fisher effect is applicable Higher cost of debt but will depriciate over the

year offseated by the reduce exposure toadverse exchange rate effect.(10 year projectand high political and currency risk)

Q4- Use of debt Advantages-1. High country risk- possibility for hedging2. Future depreciation->increase profit of company Disadvantage-1. Increase in cost of capital

8/8/2019 Blades, Inc (2)

11/13

Year 1 Year 2 Year 3

Payment inThai baht

1500 B 1500 B 11500 B

Forecastedexchange

rate of baht

0.0303 0.0294 0.0286

Payments indollar

45.45 44.1 328.9

8/8/2019 Blades, Inc (2)

12/13

8/8/2019 Blades, Inc (2)

13/13