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 into dollars. 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 dollar cash 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 the international money market) at an interest rate of 10 percent. For example, if the baht will depreciate by 10 percent over the next year, the Thai investment will render a yield of roughly 5 percent, while the company pays 10 percent interest on funds borrowed in the U.S. Since the funds could have been converted into dollars immediately and used in the 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 rate below 8 percent, it should invest the excess funds generated in Thailand at 8 percent and borrow funds at the lower interest rate. If, however, Blades can borrow funds at an interest rate above 8 percent (as is currently the case with an interest rate of 10 percent), Blades should use the excess funds generated in Thailand to support its operations rather than borrowing. Plan 1 Ben Holt's Plan Calculation of baht-denominated revenue: Price per pair of "Speedos" 4,594

 Pairs of "Speedos" 180,000 = Baht-denominated revenue 826,920,000 Calculation 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 (826,920,000 206,712,000) 620,208,000 AdChoices Interest earned on baht over a one-year period (15%) 93,031,200 Baht 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 Conversion Calculation of baht-denominated revenue: Price per pair of "Speedos" 4,594 Pairs of "Speedos" 180,000 = Baht-denominated revenue 826,920,000 Calculation 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 to be converted (826,920,000 206,712,000) 620,208,000 Spot rate of baht now $ 0.024 = Dollar receipts now $ 14,884,992 Interest earned on dollars over a one-year period (8%) 1,190,799 = Dollar receipts in one year $ 16,075,791 Calculation of dollar difference between the two plans: Plan 1 $ 15,691,262 Plan 2 16,075,791 Dollar 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