GROUP 5:

1. Khưu Võ Hoàng Dung - 1913316034

2. Nguyễn Khánh Hạ - 1913316048
3. Đoàn Bảo Lân - 1913316081
4. Lê Thị Phương Linh - 1913316087
5. Trần Phùng Khánh Loan - 1913316091

BLADES CASE: INTERNATIONAL CASH MANAGEMENT

*Overview of the case:
- Order 120,000 pairs of “Speedos”
- Price per pair: 5,000 baht
- The price of production materials purchased from Thailand is 3,000 baht/pair of shoes.
Ben Holt, Blades’ chief financial officer (CFO), has decided to finance the cost by borrowing Thai baht at an
interest rate of 6 percent over a 6-month period.  And the payment for the order will be used to repay the
loan’s principal and interest.
-The Thai subsidiary remits any remaining baht-denominated cash flows back to the United States. 
- Interest rates in Thailand have increased substantially → invest the remaining baht-denominated funds for
one year in Thailand at an interest rate of 15 percent.
+Case 1: If the funds are remitted back to the U.S. parent, the excess dollar volume resulting from the
conversion of baht will either be used to support the U.S. production of Speedos, if needed or be invested in
the United States. 
+Case 2: If the earnings of the subsidiary are not returned to the United States, Blades will be forced to
borrow cash at a 10% interest rate to finance its US operations. Any money transferred by the subsidiary that
is not utilized to support US operations shall be invested in the US at an interest rate of 8%.
⇒ Holt must choose between two alternative plans. 
First, he may direct the Thai subsidiary to return the baht loan (with interest) and invest any remaining
money in Thailand at a 15 percent interest rate.
Second, he may tell the Thai subsidiary to return the baht loan and transfer any residual cash to the United
States, where 60% would be utilized to support US activities and 40% would be deposited at an 8% interest
rate. Assume there are no income or withholding taxes on profits earned in Thailand.
*Note: The Thai baht's current spot rate is.0225, and the baht is predicted to fall by 5% over the next year.

ANSWER THE QUESTIONS:

1. There is a tradeoff between the higher interest rates in Thailand and the delayed conversion of baht
into dollars. What does this mean?
 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 subsidiary are invested in Thailand, how will U.S.
operations be affected?
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. Construct a spreadsheet that compares the cash flows resulting from the two plans. Under the first
plan, net baht-denominated cash flows (received today) will be invested in Thailand at 15 percent for a
one-year period, after which the baht will be converted to dollars. Under the second plan, net baht
denominated cash flows are converted to dollars immediately and 60 percent of the funds will be used
to support U.S. operations, while 40 percent are invested in the United States for one year at 8 percent.
Which plan is superior given the expectation of the baht’s value in one year?
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
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.