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Blades, Inc. Case
Chapter Two
1. A higher level of inflation in Thailand would most likely affect Blades in a positive
manner. Generally, if a countrys inflation increases it drives the consumers and
corporations of that country to buy more goods overseas, thus Blades sales should
2. Anticipated inflation favors Blades. If the inflation in Thailand increases both, the U.S.
and Thailand firms would be forced to raise their prices in order to maintain the profit
margin. Since Blades cost of goods sold in Thailand is relatively small, it should not be
affected as much by the inflation. This means that Blades should not have to raise prices
as much as the competitors, putting Blades in a favorable position.
3. Decreasing level of national income in Thailand would negatively impact Blades. Local
consumers will have less money to spend. In addition, because Blades product is not
a necessity but a leisure-product, the demand for it will drastically decrease. There is
also a chance that the importer may terminate the future arrangements due to the poor
4. Continued depreciation in baht would negatively impact Blades because Blades invoices
its product in this currency. Baht denominated revenue will consequently be converted
in fewer U.S. dollars. However, the demand for Blades products might be positive in
comparison to the U.S. competitors in Thailand. The U.S. competitors that export their
roller-blades to Thailand invoice their products in the U.S. dollars. In order to pay for the
dollar denominated products the importers will have to convert more baht to dollars, thus
making demand for Blades products increase in comparison to the U.S. competitors.
Blades, Inc.
Case 5
1. The possible options are: 1) Option 1 with the exercise price of $0.00756; the exercise
price is 5% above the spot rate; pay the premium that has increased to 2% of the exercise
price (the option premium is higher than what the company desires to pay). 2) Option 2
with the exercise price of $0.00792; exercise price is 10% above the spot rate; pay the
premium of 1.5%. From the given choices one can see that the tradeoff exists between
paying a higher premium or a higher exercise price. In my opinion, Blades should choose
option 1. Paying a higher exercise price limits the cause of a hedge. In addition, it would
benefit Blades more to pay a premium of $1,890 in order to limit the payables to $94,500.
2. In my opinion it should not. Given the historical data that suggests that there will most
likely be a decrease in a current spot rate, the volatile movements, and the recent event
that caused uncertainty about the yens future value, it would be vise to hedge. Another
alternative would be to consider future contracts. This is viable because the spot rate or
the futures rate of the yen did not change after the event. Blades can lock in its future
payment at the price same as before the event.
3. $0.006912. The futures rate is equal to the expected spot rate at the delivery date.
4. The best choice would be to buy a futures contract. The cost on the delivery date is the
same as remaining unhedged and it equals $86,400, however, not hedging in this case, is
not as logical option because of the possible yen fluctuation between the order date and
the delivery date. Given the other things remain constant this is the most cost efficient
solution (see spreadsheet).
Question 4
Remain unhedged
amount in yen12,500,000
expected spot rate0.006912
cost after 2 months86,400
Buy one futures contract
amount in yen12,500,000
futures price per yen0.006912
cost after 2 months86,400
Buy two optionsOption 1Option 2
amount in yen6,250,0006,250,000
exercise price0.007560.00792
premium per yen0.00015120.0001134
2 x Option 12 x Option 2Options 1 & 2
Total premium in yen1,8901,417.501653.75
exercise price86,40086,40086,400
cost after 2 months88,29087,817.5088,053.75
Question 6
Expected spot rate0.006912
Remain unhedgedStandard deviation0.0005
amount in yen12,500,000Spot rate 2 S.D. increase0.007912
expected spot rate0.007912
cost after 2 months98,900
Buy one futures contract
amount in yen12,500,000
futures price per yen0.006912
cost after 2 months86,400
Buy two optionsOption 1Option 2
amount in yen6,250,0006,250,000
exercise price0.007560.00792
premium per yen0.00015120.0001134
2 x Option 12 x Option 2Options 1 & 2
Total premium in yen1,8901,417.501653.75
exercise price94,50098,90096,700
cost after 2 months96,390100,317.5098,353.75
Blades, Inc.
Case 8
1. The inflation-exchange relationship can be found in the PPP theory. The theory
suggests that the currency of the country with the higher inflation rate should
depreciate to compensate the inflation differential. High levels of inflation in
Thailand should cause baht to depreciate since it is a freely floating currency.
Because of the export deal Blades has struck, it is unable to alter its prices so they
go in line with the level of inflation. Therefore Blades revenue would be negatively
affected. Blades costs will increase as Thai exporters adjust their prices to inflation.
Blades exports are baht-denominated thus baht depreciation will lead to a conversion
of baht into fewer dollars. However, according to the PPP the baht depreciation
should counter high levels of inflation therefore creating an impact on the high prices.
The net effect of this relationship on Blades is negative.
2. Factors that prevent PPP from occurring in the short run are: relative interest rates,
government regulations, national income, lack of proper substitute products, etc.
The reason being is that the exchange rates are impacted by factors other than the
inflation. PPP will not hold if countries negotiate trade arrangements under which
they commit themselves to the purchase or sale of a fixed number of goods over a
specified period of time. At lest it will not hold in the short run. The logic behind
this statement is that there will be a setback on the impact of inflation, and thus
the exchange rates because of the committed trade arrangements that are not easily
terminated due to the legal power of a contract.
Blades, Inc.
Case 9
1. There are several ways Blades can benefit. Blades generates baht-denominated cash
inflows and then converts them to U.S. dollars. Forecasting the exchange rate may allow
Blades to make hedging decisions. Furthermore, it is mentioned that Blades may establish
a subsidiary in Thailand. If this was to happen, profits earned by this subsidiary will be
in baht. These earnings will then be sent back to the parent or reinvested in Thailand. In
both scenarios forecasting exchange rate is vital for companys future.
2. A market-based forecast is the easiest to use because it is based on either spot rate or the
forward rate. In this case it would be better to use forward rates.
3. The forward rates would yield a better market-based forecast. It is said that the available
forward rates currently exhibit a large discount, which implies higher interest rate, which
then implies higher inflation. Higher inflation is associated with a downward pressure on
the baht, which is a valid forecast. Using the present spot rate to forecast future spot rate
would mean that the value of the baht would not fluctuate, which is not likely to happen.
4.
market-based forecast -
By using the forward rate market-based forecast it is shown that baht is expected to
change by -8.70 percent. The value of the baht in 90 days according to this forecast will
-0.08696
be $0.021.
5. Weekly accuracy of technical forecast indicates market inefficiency for the baht-dollar
exchange rates. Technical forecasting involves the use of historical exchange rate data to
predict future rates and mostly apply to very shot-term periods such as one day. Given
the conditions Thailand is in, examination of past movements will not be useful for
indicating future rates.
6.
fundamental forecast -
The expected change using the fundamental forecast is -6.85 percent.
-0.0685
forecasted value of the baht -
The forecasted value of the baht using the expected value as the forecast is $.0214.
absolute error- technical forecasting -absolute error- fundamental forecasting -absolute error- market-based forecasting -
0.021425
-0.01727-0.02614-0.04545
The absolute forecast errors are as follows: technical forecasting 1.73%; fundamental
forecasting 2.61%; and the market-based forecast 4.54%. Observing given forecasting
techniques and their absolute errors the conclusion arises that the most accurate technique
is the technical forecasting.
7. It will not. As mentioned earlier, technical forecasting involves the use of historical
exchange rate data to predict future rates. Examination of past movements will
most likely not be as useful for indicating future rates in Thailand. There are a lot of
uncertainties when it comes to exchange rates in this country. There is a high volatility
of the baht-dollar exchange rate. In addition, Thai economy is experiencing unfavorable
conditions that will have an affect on exchange rates.
Blades, Inc.
Case 10
1. Blades is subject to transaction and economic exposure. Transaction exposure is the
exposure of an organizations contractual transactions to exchange rate movements.
Economic exposure is any exposure of a companys cash flows to exchange rate
movements.
2. See attached spreadsheet.
3. It will reduce Blades transaction exposure. The reason being is that if the dollar revenue
is decreased due to baht depreciation, the dollar cost will also decrease due to the
depreciation of yen (Blades generates baht-denominated net inflows, but its outflows are
yen-denominated).
4. I dont think it should. Blades only way of reducing its net transaction exposure lies in
importing from Japan due to the high correlation level between baht and yen. It is less
likely that the correlation between these two currencies will last for the extended period
of time. The correlation has been low in the past and will most likely return to its normal
state in the future.
5. The transaction exposure will have a slight increase. In this scenario two factors impact
transaction exposure. Firstly, Blades net cash inflows would be denominated in foreign
currencies driving the transaction exposure upwards. Secondly, the correlation between
baht and yen on one side, and British pound on the other, is not significantly high. This
means that changes in one currency (BP) may not drastically affect the other (baht).
Currencyinflowoutflownet inflow-outfllwexpected exchange rateinflow/outflow in U.S. $
British pound16,000,00016,000,0001.524,000,000.00
Japanese yen12,648,00012,648,0000.0083104,978.40
Thai baht826,920,000206,712,000620,208,0000.02414,884,992.00
Currencynet inflow-outflowpossible e.r. range frompossible e.r. range torange in U.S. $ fromrange in U.S. $ to
British pound16,000,0001.471.5323,520,000.0024,480,000.00
Japanese yen12,648,0000.00790.008799,919.20110,037.60
Thai baht620,208,0000.0200.02812,404,160.0017,365,824.00
Blades, Inc.
Case 11
1.
bahtOutflow (90 days)54,000,000
bahtNet inflow (outflow)152,730,000
Forward Hedge
Revenue152,730,000
Forward rate0.0215
Dollars to be received (90 days)3,283,695
Money Market Hedge
Ammount borrowed (baht)146,855,769
Dollars from converting baht3,377,683
Dollars accumulated (90 days)3,448,614
Stay Unhedged
ProbabilitySpot rateDollars from converting baht
5%0.20003,054,600
200.02133,253,149
300.02173,314,241
250.02203,360,060
150.02303,512,790
50.02353,589,155
The best option would be to use the money market hedge.
2.
BPInflow (90 days)4,000,000
BPOutflow (90 days)
BPNet inflow (outflow)4,000,000
Forward Hedge
Revenue4,000,000
Forward rate1.49
Dollars to be received (90 days)5,960,000
Money Market Hedge
Ammount borrowed (BP)3,921,569
Dollars from converting BP5,882,353
Dollars accumulated (90 days)6,005,882
Stay Unhedged
ProbabilitySpot rateDollars from converting baht
5%1.45005,800,000
201.47005,880,000
301.48005,920,000
251.49005,960,000
151.50006,000,000
51.52006,080,000
The best option would be to use the market hedge.
3. It is easier for Blades to hedge its inflows denominated in foreign currencies. The reason
being that Blades outflows are impacted by payables denominated in foreign currencies
and the future exchange rate, while the dollar inflows are impacted only by the exchange
rates.
4. None of the hedges would require Blades to over-hedge. In addition, Blades is not subject
to over-hedge with a money market hedge. The arrangements with Thai and British
companies are using fixed prices.
5. Blades could modify the timing in order to reduce its transaction exposure. The way
Blades can do this is by importing materials in order to manufacture 68,910 pairs of
Speedos (quarterly revenue / cost per pair of Speedos). The Thai customer can then make
a direct payment to the Thai supplier. The tradeoff of this modification is that in order to
reduce transaction exposure for this quarter, Blades sacrifices transaction exposure for the
future, making it higher. In addition, Blades will have to deal with excess inventory.
6. Blades could modify the payment practices to reduce its transaction exposure. Blades
has a policy of paying Thai imports upon a day of delivery in order to maintain a good
trade relationship. This means that Blades pays the suppliers 60 days ahead of the
allowed period. Any currency changes in this period could affect Blades. The tradeoff
would be that Blades will not be able to use baht-denominated costs to balance its baht-
denominated revenues.
7. Given all the conditions, Blades could benefit from long-term forward contracts for
both baht and BP, agree to a parallel loan, or swap currencies. The reason being is that
long-term hedging is possible for companies that can estimate their foreign currency
receivables and payables.
Blades, Inc.
Case 12
1. Blades would be negatively affected in several ways. Firstly, if the commitment is
renewed the agreed prices would be fixed. In addition, high level of inflation would
cause baht to depreciate, thus decreasing the dollars gained from baht-denominated
sales. Finally, the costs of goods sold in Thailand would be negatively impacted by the
2. With the current conditions it is less likely that Thai importer will renew its commitment.
The reason being - negative economical effects. With the high inflation and possibility
of baht depreciating, Thai customers will be less willing to spend money on leisure
products. However, if the economy returns to the high growth level, Thai importer will
more likely want to renew the deal. The importer will be confident in the future sales.
3.
0.0220.02090.0198baht
Sales1.531.4851.5BP
U.S.62,400,000 62,400,000 62,400,000
Thai18,192,240 17,282,628 16,373,016
British24,480,000 23,760,000 24,000,000
Total105,072,240 103,442,628 102,773,016
Cost
U.S.57,400,000 57,400,000 57,400,000
Thai5,280,000 5,016,000 4,752,000
Total62,680,000 62,416,000 62,152,000
Expenses
U.S. Fixed2,000,000 2,000,001 2,000,002
U.S. Variable6,864,000 6,864,000 6,864,000
Total8,864,000 8,864,001 8,864,002
CF before taxes33,528,240 32,162,627 31,757,014
Blades doesnt seam to be impacted much by the high level of economic exposure.
4.
0.0220.02090.0198baht
Sales1.51.4251.35BP
U.S.62,400,000 62,400,000 62,400,000
Thai18,192,240 17,282,628 16,373,016
British24,000,000 22,800,000 21,600,000
Total104,592,240 102,482,628 100,373,016
Cost
U.S.57,400,000 57,400,000 57,400,000
Thai5,280,000 5,016,000 4,752,000
Total62,680,000 62,416,000 62,152,000
Expenses
U.S. Fixed2,000,000 2,000,000 2,000,000
U.S. Variable6,864,000 6,864,000 6,864,000
Total8,864,000 8,864,000 8,864,000
CF before taxes33,048,240 31,202,628 29,357,016
Here we can see that if baht and BP are perfectly correlated Blades would be exposed to
increasing level of economic risk. The main reason is that Blades generates its inflows in
both currencies. A depreciation of both currencies would have a more significant affect
on Blades cash flows before taxes.
5. Blades can choose to do several things to reduce its level of economic exposure to
Thailand. One option would be to diversify the selection of countries to do business
with. By incorporating countries that have insignificant correlation to each other, Blades
reduces its economic exposure. Furthermore, Blades can engage in buying supplies in
Thailand, thus creating more cash outflows in baht. Blades could borrow in baht, pay off
baht-denominated loans, and convert baht to dollars to pay U.S. supplies. Finally, Blades
could borrow in baht, pay off baht-denominated loans, and convert baht to dollars to pay
U.S. supplies.
Blades, Inc.
Case 13
1. Given the current situation, there are several things that would factor in a positive
DFI. Firstly, Blades generates higher profit margin in Thailand. In addition, the cost of
materials is significantly cheaper in Thailand. DFI in Thailand would diversify the risk.
In other words, Blades would not be solely reliant on the U.S. economic conditions.
Finally, Blades would increase its overall market share.
2. The main tradeoff is between the initial outlay required to invest and operating under
uncertain economic conditions. If Blades was to engage in DFI now, the initial outlay
will be low. However, the primary concern is that Thai consumers have not been affected
yet by the unfavorable economic conditions, and the possibility that the economic
conditions will not improve in the future. If this was to happen, Blades would pay a price.
Nevertheless, If Blades waits one year and economy improves, the initial outlay required
would be high, and there is a change there might be heavier competition. As a financial
consultant for Blades, I would advise a scenario analysis, as well as the series of other
financial analysis (applying various ratios, etc.) prior to making this decision. Scenario
analysis would be useful because we can see the possible outcomes and the changes
for worst, best, and average situation. We could go from there. Based on the current
situation, however, I would advise Ben Holt to wait with the DFI.
3. Again the main tradeoff is profits versus the risk of poor economic conditions. If Blades
renews the agreement with the retailer for another 3 years, it will tie itself to relatively
low prices it charges the Thai retailer. If economic conditions improve, there would be
an expected increase in the demand for Blades products. Blades would generate higher
profit margins if decided to enter the market through the subsidiary, or construct a more
favorable deal with another retailer. On the other hand, if economic conditions continue
to worsen, the agreement would be profitable for Blades. Again I believe that a set of
financial analysis are needed prior to making this decision.
4. Given all the conditions mentioned, Thai government would have to consider the impact
of Blades subsidiary on the employment, as well as the impact of Blades subsidiary
to local businesses. Generally, Blades (and companies likes Blades) could reduce
the unemployment rate if they were to commit to employ local workers. However,
Thai government should be concerned about the local businesses. In the long run,
companies like Blades could run Thai competitors out of business, thus increasing the
unemployment even more. In reality, it all depends on the government policy to allow
foreign investments. I believe that Thai government would most likely welcome MNCs
subsidiaries in order to deal with the unemployment in a short run. Another promising
solution would be possible mergers and acquisitions.
Blades, Inc.
Case 14
1. In the given scenario, sales from the existing agreement should not be included in the
capital budgeting analysis. The reason being is that Blades would have these sales with
or without the subsidiary in Thailand. The cost savings for the pairs not sourced from
Thailand should be included because these sales would not happen if Blades continued
to import from Thailand. Finally, the sales resulting from a renewed agreement should be
included in the capital budgeting analysis because this revenue is incremental to creating
2. See spreadsheet. Blades should establish the subsidiary in Thailand under the given
conditions. The capital budgeting analysis shows a positive NPV if Blades renews the
agreement with Entertainment Products and establishes the subsidiary
3. See spreadsheet. The capital budgeting analysis indicates that Blades should establish a
subsidiary and not renew its agreement. The NPV was $8,746,688
4. See spreadsheet. The salvage value is not that critical. The capital budgeting analysis in
question 2 is the most feasible alternative. As spreadsheet suggests (comparing question
3 and question 4), even if Blades salvage value is reduced to 0 (Blades does not sell the
subsidiary), the NPV remains positive.
5. See spreadsheet. The capital budgeting analysis shows a positive NPV of $5,620,315 for
the worst case scenario. Therefore, Blades should establish the subsidiary even if baht
depreciates by 5 percent annually.
Capital Budgeting Analysis
PROBLEM # 2Year 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10
Demand - Entertainment Products180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000
Price per unit - baht4,594 4,594 4,594 4,594 4,594 4,594 4,594 4,594 4,594
Revenue from agreement0 826,920,000 826,920,000 826,920,000 826,920,000 826,920,000 826,920,000 826,920,000 826,920,000 826,920,000
Other retailers120,000 120,000 220,000 220,000 220,000 220,000 220,000 220,000 220,000 220,000
Price per unit - baht5,000 5,600 6,272 7,025 7,868 8,812 9,869 11,053 12,380 13,865
Revenue from other retailers600,000,000 672,000,000 1,379,840,000 1,545,420,800 1,730,871,296 1,938,575,852 2,171,204,954 2,431,749,548 2,723,559,494 3,050,386,633
Total revenue600,000,000 1,498,920,000 2,206,760,000 2,372,340,800 2,557,791,296 2,765,495,852 2,998,124,954 3,258,669,548 3,550,479,494 3,877,306,633
Variable cost per unit3,500 3,920 4,390 4,917 5,507 6,168 6,908 7,737 8,666 9,706
Total variable cost420,000,000 1,176,000,000 1,756,160,000 1,966,899,200 2,202,927,104 2,467,278,356 2,763,351,759 3,094,953,970 3,466,348,447 3,882,310,260
Less: cost savings32,400,000
Other fixed expenses25,000,000 28,000,000 31,360,000 35,123,200 39,337,984 44,058,542 49,345,567 55,267,035 61,899,079 69,326,969
Depreciation30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
Total expenses442,600,000 1,234,000,000 1,817,520,000 2,032,022,400 2,272,265,088 2,541,336,899 2,842,697,326 3,180,221,006 3,558,247,526 3,981,637,229
EBT of susidiary157,400,000 264,920,000 389,240,000 340,318,400 285,526,208 224,158,953 155,427,627 78,448,543 -7,768,032 -104,330,596
Host government tax (25%)39,350,000 66,230,000 97,310,000 85,079,600 71,381,552 56,039,738 38,856,907 19,612,136 -1,942,008 -26,082,649
After tax earnings of subsidiary118,050,000 198,690,000 291,930,000 255,238,800 214,144,656 168,119,215 116,570,720 58,836,407 -5,826,024 -78,247,947
NCF to subsidiary148,050,000 228,690,000 321,930,000 285,238,800 244,144,656 198,119,215 146,570,720 88,836,407 24,173,976 -48,247,947
Baht remitted by susidiary148,050,000 228,690,000 321,930,000 285,238,800 244,144,656 198,119,215 146,570,720 88,836,407 24,173,976 -48,247,947
Witholding tax on remitted funds (10%)14,805,000 22,869,000 32,193,000 28,523,880 24,414,466 19,811,921 14,657,072 8,883,641 2,417,398 -4,824,795
Baht remitted after witholding taxes133,245,000 205,821,000 289,737,000 256,714,920 219,730,190 178,307,293 131,913,648 79,952,766 21,756,578 -43,423,152
Salvage value650,000,000
Exchange rate - baht0.02300 0.02254 0.02209 0.02165 0.02121 0.02079 0.02037 0.01997 0.01957 0.01918 0.01879
CF to parent3,003,342 4,546,421 6,272,057 5,446,070 4,568,230 3,632,900 2,633,905 1,564,480 417,208 11,399,201
PV of parent CF (25% discount rate)2,402,674 2,909,710 3,211,293 2,230,710 1,496,918 952,343 552,370 262,476 55,997 1,223,980
Initial investment by parent12,650,000
Cumulative PV-10,247,326 -7,337,617 -4,126,323 -1,895,613 -398,695 553,648 1,106,018 1,368,494 1,424,490 2,648,470
PROBLEM # 3Year 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10
Demand - Entertainment Products5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000
Price per unit - baht5,600 6,272 7,025 7,868 8,812 9,869 11,053 12,380 13,865
Revenue from agreement0 28,000,000 31,360,000 35,123,200 39,337,984 44,058,542 49,345,567 55,267,035 61,899,079 69,326,969
Other retailers120,000 120,000 220,000 220,000 220,000 220,000 220,000 220,000 220,000 220,000
Price per unit - baht5,000 5,600 6,272 7,025 7,868 8,812 9,869 11,053 12,380 13,865
Revenue from other retailers600,000,000 672,000,000 1,379,840,000 1,545,420,800 1,730,871,296 1,938,575,852 2,171,204,954 2,431,749,548 2,723,559,494 3,050,386,633
Total revenue600,000,000 700,000,000 1,411,200,000 1,580,544,000 1,770,209,280 1,982,634,394 2,220,550,521 2,487,016,583 2,785,458,573 3,119,713,602
Variable cost per unit3,500 3,920 4,390 4,917 5,507 6,168 6,908 7,737 8,666 9,706
Total variable cost420,000,000 490,000,000 987,840,000 1,106,380,800 1,239,146,496 1,387,844,076 1,554,385,365 1,740,911,608 1,949,821,001 2,183,799,521
Less: cost savings32,400,000
Other fixed expenses25,000,000 28,000,000 31,360,000 35,123,200 39,337,984 44,058,542 49,345,567 55,267,035 61,899,079 69,326,969
Depreciation30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
Total expenses442,600,000 548,000,000 1,049,200,000 1,171,504,000 1,308,484,480 1,461,902,618 1,633,730,932 1,826,178,644 2,041,720,081 2,283,126,490
EBT of susidiary157,400,000 152,000,000 362,000,000 409,040,000 461,724,800 520,731,776 586,819,589 660,837,940 743,738,493 836,587,112
Host government tax (25%)39,350,000 38,000,000 90,500,000 102,260,000 115,431,200 130,182,944 146,704,897 165,209,485 185,934,623 209,146,778
After tax earnings of subsidiary118,050,000 114,000,000 271,500,000 306,780,000 346,293,600 390,548,832 440,114,692 495,628,455 557,803,869 627,440,334
NCF to subsidiary148,050,000 144,000,000 301,500,000 336,780,000 376,293,600 420,548,832 470,114,692 525,628,455 587,803,869 657,440,334
Baht remitted by susidiary148,050,000 144,000,000 301,500,000 336,780,000 376,293,600 420,548,832 470,114,692 525,628,455 587,803,869 657,440,334
Witholding tax on remitted funds (10%)14,805,000 14,400,000 30,150,000 33,678,000 37,629,360 42,054,883 47,011,469 52,562,845 58,780,387 65,744,033
Baht remitted after witholding taxes133,245,000 129,600,000 271,350,000 303,102,000 338,664,240 378,493,949 423,103,223 473,065,609 529,023,482 591,696,300
Salvage value650,000,000
Exchange rate - baht0.02300 0.02254 0.02209 0.02165 0.02121 0.02079 0.02037 0.01997 0.01957 0.01918 0.01879
CF to parent3,003,342 2,862,760 5,874,026 6,430,148 7,040,890 7,711,578 8,448,054 9,256,735 10,144,659 23,334,794
PV of parent CF (25% discount rate)2,402,674 1,832,167 3,007,501 2,633,788 2,307,159 2,021,544 1,771,685 1,553,022 1,361,593 2,505,554
Initial investment by parent12,650,000
Cumulative PV-10,247,326 -8,415,160 -5,407,658 -2,773,870 -466,711 1,554,833 3,326,518 4,879,541 6,241,134 8,746,688
PROBLEM # 4Year 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10
Demand - Entertainment Products5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000
Price per unit - baht5,600 6,272 7,025 7,868 8,812 9,869 11,053 12,380 13,865
Revenue from agreement0 28,000,000 31,360,000 35,123,200 39,337,984 44,058,542 49,345,567 55,267,035 61,899,079 69,326,969
Other retailers120,000 120,000 220,000 220,000 220,000 220,000 220,000 220,000 220,000 220,000
Price per unit - baht5,000 5,600 6,272 7,025 7,868 8,812 9,869 11,053 12,380 13,865
Revenue from other retailers600,000,000 672,000,000 1,379,840,000 1,545,420,800 1,730,871,296 1,938,575,852 2,171,204,954 2,431,749,548 2,723,559,494 3,050,386,633
Total revenue600,000,000 700,000,000 1,411,200,000 1,580,544,000 1,770,209,280 1,982,634,394 2,220,550,521 2,487,016,583 2,785,458,573 3,119,713,602
Variable cost per unit3,500 3,920 4,390 4,917 5,507 6,168 6,908 7,737 8,666 9,706
Total variable cost420,000,000 490,000,000 987,840,000 1,106,380,800 1,239,146,496 1,387,844,076 1,554,385,365 1,740,911,608 1,949,821,001 2,183,799,521
Less: cost savings32,400,000
Other fixed expenses25,000,000 28,000,000 31,360,000 35,123,200 39,337,984 44,058,542 49,345,567 55,267,035 61,899,079 69,326,969
Depreciation30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
Total expenses442,600,000 548,000,000 1,049,200,000 1,171,504,000 1,308,484,480 1,461,902,618 1,633,730,932 1,826,178,644 2,041,720,081 2,283,126,490
EBT of susidiary157,400,000 152,000,000 362,000,000 409,040,000 461,724,800 520,731,776 586,819,589 660,837,940 743,738,493 836,587,112
Host government tax (25%)39,350,000 38,000,000 90,500,000 102,260,000 115,431,200 130,182,944 146,704,897 165,209,485 185,934,623 209,146,778
After tax earnings of subsidiary118,050,000 114,000,000 271,500,000 306,780,000 346,293,600 390,548,832 440,114,692 495,628,455 557,803,869 627,440,334
NCF to subsidiary148,050,000 144,000,000 301,500,000 336,780,000 376,293,600 420,548,832 470,114,692 525,628,455 587,803,869 657,440,334
Baht remitted by susidiary148,050,000 144,000,000 301,500,000 336,780,000 376,293,600 420,548,832 470,114,692 525,628,455 587,803,869 657,440,334
Witholding tax on remitted funds (10%)14,805,000 14,400,000 30,150,000 33,678,000 37,629,360 42,054,883 47,011,469 52,562,845 58,780,387 65,744,033
Baht remitted after witholding taxes133,245,000 129,600,000 271,350,000 303,102,000 338,664,240 378,493,949 423,103,223 473,065,609 529,023,482 591,696,300
Salvage value0
Exchange rate - baht0.02300 0.02254 0.02209 0.02165 0.02121 0.02079 0.02037 0.01997 0.01957 0.01918 0.01879
CF to parent3,003,342 2,862,760 5,874,026 6,430,148 7,040,890 7,711,578 8,448,054 9,256,735 10,144,659 11,119,556
PV of parent CF (25% discount rate)2,402,674 1,832,167 3,007,501 2,633,788 2,307,159 2,021,544 1,771,685 1,553,022 1,361,593 1,193,953
Initial investment by parent12,650,000
Cumulative PV-10,247,326 -8,415,160 -5,407,658 -2,773,870 -466,711 1,554,833 3,326,518 4,879,541 6,241,134 7,435,087
PROBLEM # 5Year 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10
Demand - Entertainment Products5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000
Price per unit - baht5,600 6,272 7,025 7,868 8,812 9,869 11,053 12,380 13,865
Revenue from agreement0 28,000,000 31,360,000 35,123,200 39,337,984 44,058,542 49,345,567 55,267,035 61,899,079 69,326,969
Other retailers120,000 120,000 220,000 220,000 220,000 220,000 220,000 220,000 220,000 220,000
Price per unit - baht5,000 5,600 6,272 7,025 7,868 8,812 9,869 11,053 12,380 13,865
Revenue from other retailers600,000,000 672,000,000 1,379,840,000 1,545,420,800 1,730,871,296 1,938,575,852 2,171,204,954 2,431,749,548 2,723,559,494 3,050,386,633
Total revenue600,000,000 700,000,000 1,411,200,000 1,580,544,000 1,770,209,280 1,982,634,394 2,220,550,521 2,487,016,583 2,785,458,573 3,119,713,602
Variable cost per unit3,500 3,920 4,390 4,917 5,507 6,168 6,908 7,737 8,666 9,706
Total variable cost420,000,000 490,000,000 987,840,000 1,106,380,800 1,239,146,496 1,387,844,076 1,554,385,365 1,740,911,608 1,949,821,001 2,183,799,521
Less: cost savings32,400,000
Other fixed expenses25,000,000 28,000,000 31,360,000 35,123,200 39,337,984 44,058,542 49,345,567 55,267,035 61,899,079 69,326,969
Depreciation30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
Total expenses442,600,000 548,000,000 1,049,200,000 1,171,504,000 1,308,484,480 1,461,902,618 1,633,730,932 1,826,178,644 2,041,720,081 2,283,126,490
EBT of susidiary157,400,000 152,000,000 362,000,000 409,040,000 461,724,800 520,731,776 586,819,589 660,837,940 743,738,493 836,587,112
Host government tax (25%)39,350,000 38,000,000 90,500,000 102,260,000 115,431,200 130,182,944 146,704,897 165,209,485 185,934,623 209,146,778
After tax earnings of subsidiary118,050,000 114,000,000 271,500,000 306,780,000 346,293,600 390,548,832 440,114,692 495,628,455 557,803,869 627,440,334
NCF to subsidiary148,050,000 144,000,000 301,500,000 336,780,000 376,293,600 420,548,832 470,114,692 525,628,455 587,803,869 657,440,334
Baht remitted by susidiary148,050,000 144,000,000 301,500,000 336,780,000 376,293,600 420,548,832 470,114,692 525,628,455 587,803,869 657,440,334
Witholding tax on remitted funds (10%)14,805,000 14,400,000 30,150,000 33,678,000 37,629,360 42,054,883 47,011,469 52,562,845 58,780,387 65,744,033
Baht remitted after witholding taxes133,245,000 129,600,000 271,350,000 303,102,000 338,664,240 378,493,949 423,103,223 473,065,609 529,023,482 591,696,300
Salvage value650,000,000
Exchange rate - baht0.02300 0.02185 0.02076 0.01972 0.01873 0.01780 0.01691 0.01606 0.01526 0.01450 0.01377
CF to parent2,911,403 2,690,172 5,350,920 5,678,205 6,027,194 6,399,240 6,795,781 7,218,352 7,668,585 17,099,337
PV of parent CF (25% discount rate)2,329,123 1,721,710 2,739,671 2,325,793 1,974,991 1,677,522 1,425,179 1,211,039 1,029,260 1,836,027
Initial investment by parent12,650,000
Cumulative PV-10,320,877 -8,599,167 -5,859,496 -3,533,703 -1,558,712 118,810 1,543,989 2,755,027 3,784,287 5,620,315
Blades, Inc.
Case 15
1. See spreadsheet. Blades should choose to establish a subsidiary in Thailand. The
NPV with acquisition would be $6,641,949. The NVP without the acquisition results
$8,746,668. Therefore, $8,746,668 - $6,641,949 = $2,104,739.
2. See spreadsheet. Blades should reduce the purchase price by $2,104,739 / $0.023 =
$91,510,391. Therefore, the maximum amount Blades should be willing to pay is
$1,000,000,000 - $91,510,391 = $908,489,609 baht.
3. Blades should consider several factors. The price asked for the SkatesnStuff is lower
in comparison to the capital budget analysis. Blades should find out why the company is
being sold for that price. In addition, Blades should also look into the acquisition of an
existing business in Thailand. Getting to know the local market is essential. Moreover,
the information I was provided with may be inaccurate. If that is the case the capital
budgeting analysis would be inaccurate. Another important factor is the quality of
roller blades and the production process. The lower quality roller blades produced by
SkatersnStuff may jeopardize Blades reputation. Finally, there might be issues with
management if the acquisition happens. Blades would have to make sure that the right
people are on the bus. This may lead to a mass layoff.
Capital Budgeting Analysis Year 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10
Demand - retailers280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000
Price per unit - baht4,500 5,040 5,645 6,322 7,081 7,931 8,882 9,948 11,142 12,479 13,976
Revenue from retailers1,260,000,000 1,411,200,000 1,580,544,000 1,770,209,280 1,982,634,394 2,220,550,521 2,487,016,583 2,785,458,573 3,119,713,602 3,494,079,234 3,913,368,743
Total revenue1,260,000,000 1,411,200,000 1,580,544,000 1,770,209,280 1,982,634,394 2,220,550,521 2,487,016,583 2,785,458,573 3,119,713,602 3,494,079,234 3,913,368,743
Variable cost per unit3,500 3,920 4,390 4,917 5,507 6,168 6,908 7,737 8,666 9,706 10,870
Total variable cost980,000,000 1,097,600,000 1,229,312,000 1,376,829,440 1,542,048,973 1,727,094,850 1,934,346,231 2,166,467,779 2,426,443,913 2,717,617,182 3,043,731,244
Less: cost savings32,400,000 32,400,000
Other fixed expenses20,000,000 22,400,000 25,088,000 28,098,560 31,470,387 35,246,834 39,476,454 44,213,628 49,519,264 55,461,575 62,116,964
Depreciation60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000
Total expenses1,027,600,000 1,147,600,000 1,314,400,000 1,464,928,000 1,633,519,360 1,822,341,683 2,033,822,685 2,270,681,407 2,535,963,176 2,833,078,757 3,165,848,208
EBT of susidiary232,400,000 263,600,000 266,144,000 305,281,280 349,115,034 398,208,838 453,193,898 514,777,166 583,750,426 661,000,477 747,520,534
Host government tax (25%)58,100,000 65,900,000 66,536,000 76,320,320 87,278,758 99,552,209 113,298,475 128,694,291 145,937,606 165,250,119 186,880,134
After tax earnings of subsidiary174,300,000 197,700,000 199,608,000 228,960,960 261,836,275 298,656,628 339,895,424 386,082,874 437,812,819 495,750,358 560,640,401
NCF to subsidiary234,300,000 257,700,000 259,608,000 288,960,960 321,836,275 358,656,628 399,895,424 446,082,874 497,812,819 555,750,358 620,640,401
Baht remitted by susidiary234,300,000 257,700,000 259,608,000 288,960,960 321,836,275 358,656,628 399,895,424 446,082,874 497,812,819 555,750,358 620,640,401
Witholding tax on remitted funds (10%)23,430,000 25,770,000 25,960,800 28,896,096 32,183,628 35,865,663 39,989,542 44,608,287 49,781,282 55,575,036 62,064,040
Baht remitted after witholding taxes210,870,000 231,930,000 233,647,200 260,064,864 289,652,648 322,790,965 359,905,881 401,474,587 448,031,537 500,175,322 558,576,361
Salvage value1,100,000,000
Exchange rate - baht0.02300 0.02254 0.02209 0.02165 0.02121 0.02079 0.02037 0.01997 0.01957 0.01918 0.01879
CF to parent4,850,010 5,227,702 5,161,080 5,629,732 6,144,827 6,710,882 7,332,857 8,016,198 8,766,879 9,591,461 31,169,086
PV of parent CF (25% discount rate)4,850,010 4,182,162 3,303,091 2,882,423 2,516,921 2,199,022 1,922,265 1,681,119 1,470,838 1,287,344 3,346,755
Initial investment by parent23,000,000
Cumulative PV-18,149,990 -13,967,828 -10,664,737 -7,782,314 -5,265,393 -3,066,372 -1,144,107 537,012 2,007,850 3,295,194 6,641,949