Blades, Inch. Case

Question No.1:
One point of concern for you is that there is a trade of between higher interest rates in Thailand and delayed conversion of baht in to dollars, explain what does that mean?
Answer:
The term trade off here refers to the concept explained by Miller in his theory trade off theory of capital. The crux of the theory is that you got two options and you have to select the best one out of that. Here the two available options are i) The revenues denominated in are converted into dollars immediately and invested at 8% in united state (immediate conversion).

ii) Feasibility of investing Blade’s excess funds from Thailand at a higher interest rate of 15%for one year, after which the baht will be converted in to dollars (delayed conversion).

180,000(Speedos) x THB4591 (per pair) = THB 826920000
Cost of making 72000 Speedos = 72000 x THB 2871(per pair) = (206712000) Revenue = THB620208000

Options
1. Immediate conversion
2. Delayed conversion

1. Immediate conversion

620208000 x $0.024 = $ 14884992

$ 14884992 x 1.08 = $ 16075791

(Recommended)

2. Delayed conversion

620208000 x 15% = 93031200

93031200 + 620208000 = 713239200

OR

620208000 X 1.15 = THB713239200

Future value after one year

713239200 x $0.022(spot rate after 1 year) = $15691262.4

Question no.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:
Thai baht is depreciating against dollar which in turn will affect the cash inflows. Secondly it is mentioned that are used to cover the cost of goods sold in the US manufacturing plant located in Nebraska so if the cash in flows denominated in Thai baht are invested in Thailand at 15% rate and then converted into dollars