alternative products would require major modifications B u s i n e s s F i n a n c e

Decision to Expand Internationally

Blades, Inc., is a U.S.-based company that has been incorporated in the United States for 3 years. Blades is a relatively small company, with total assets of only $200 million. The company produces a single type of product, roller blades. Due to the booming roller blades market in the United States at the time of the company’s establishment, Blades has been quite successful. For example, in its first year of operation, it reported a net income of $3.5 million. Recently, however, the demand for Blades’ “Speedos,” the company’s primary product in the United States, has been slowly tapering off, and Blades has not been performing well. Last year, it reported a return on assets of only 7%. In response to the company’s annual report for its most recent year of operations, Blades’ shareholders have been pressuring the company to improve its performance; its stock price has fallen from a high of $20 per share 3 years ago to $12 last year. Blades produces high-quality roller blades and employs a unique production process, but the prices it charges are among the top 5 percent in the industry.

In light of these circumstances, Ben Holt, the company’s chief financial officer (CFO), is contemplating alternative courses to take for Blades’ future. Blades cannot implement any additional cost-cutting measures in the United States without affecting the quality of its product. Also, production of alternative products would require major modifications to the existing plant setup. Furthermore, and because of these limitations, expansion within the United States at this time seems pointless.

Holt is considering the following: If Blades cannot penetrate the U.S. market further or reduce costs here, why not import some parts from overseas and/or expand the company’s sales to foreign countries? Similar strategies have proved successful for numerous companies that expanded into Asia in recent years, allowing them to increase their profit margins. The CFO’s initial focus is on Thailand. Thailand has recently experienced weak economic conditions, and Blades could purchase components there at a low cost. Holt is aware that many of Blades’ competitors have begun importing production components from Thailand.

Not only would Blades be able to reduce costs by importing rubber and/or plastic from Thailand due to the low costs of these imports, but it might also be able to augment its weak U.S. sales by exporting its finished products to Thailand, an economy still in its infancy and just beginning to appreciate leisure products such as roller blades. Although several of Blades’ competitors import components from Thailand, few are exporting to the country. Long-term decisions would also eventually have to be made: Perhaps Blades could establish a subsidiary in Thailand and gradually shift its focus away from the United States if its U.S. sales do not rebound. Establishing a subsidiary in Thailand would also make sense for Blades due to its superior production process. Holt is reasonably sure that Thai firms could not duplicate the high-quality production process employed by Blades. Furthermore, if the company’s initial approach of exporting works well, establishing a subsidiary in Thailand would preserve Blades’ sales before Thai competitors are able to penetrate the Thai market.

As a financial analyst for Blades, Inc., you are assigned to analyze international opportunities and risk resulting from international business. Your initial assessment should focus on the barriers and opportunities that international trade may offer. Holt has never been involved in international business in any form and is unfamiliar with any constraints that may negatively affect his plan to export to and import from a foreign country. Holt has presented you with a list of initial questions that you should answer.

Assessment of Future Exchange Rate Movements

In addition, as the chief financial officer of Blades, Inc., Ben Holt is pleased that his current system of exporting “Speedos” to Thailand seems to be working well. Blades’ primary customer in Thailand, a retailer called Entertainment Products, has committed to purchasing a fixed number of Speedos annually for the next three years at a fixed price denominated in baht, Thailand’s currency. Furthermore, Blades is using a Thai supplier for some of the components needed to manufacture Speedos. Nevertheless, Holt is concerned about recent developments in Asia. Foreign investors from various countries had invested heavily in Thailand to take advantage of the high interest rates there. As a result of the weak economy in Thailand, however, many foreign investors have lost confidence in Thailand and withdrawn their funds.

Holt has two major concerns regarding these developments. First, he wonders how these changes in Thailand’s economy could affect the value of the Thai baht and, consequently, Blades. More specifically, he wonders whether the effects on the Thai baht may affect Blades even though its primary Thai customer is committed to Blades over the next three years.

Second, Holt believes that Blades may be able to speculate on the anticipated movement of the baht, but he is uncertain about the procedure needed to accomplish this. To facilitate Holt’s understanding of exchange rate speculation, he has asked you, Blades’ financial analyst, to provide him with detailed illustrations of two scenarios. In the first scenario, the baht would move from a current level of $0.022 to $0.020 within the next 30 days. In the second scenario, the baht would move from its current level to $0.025 within the next 30 days.

Case Questions:

1. What are the advantages that Blades could gain from importing from and/or exporting to a foreign country such as Thailand?
2. What are some of the disadvantages that Blades could face as a result of foreign trade in the short run? In the long run?
3. What long-range plans other than establishment of a subsidiary in Thailand are an option for Blades and may be more suitable for the company?
4. Based on Holt’s needs, perform an assessment on future exchange rate movements. Specifically:
5. How are percentage changes in a currency’s value measured? Illustrate your answer numerically by assuming a change in the Thai baht’s value from a value of $0.022 to $0.026.
6. What are the basic factors that determine the value of a currency? In equilibrium, what is the relationship between these factors?
7. How might the relatively high levels of inflation and interest rates in Thailand affect the baht’s value? (Assume a constant level of U.S. inflation and interest rates.)
8. How might the loss of confidence in the Thai baht, evidenced by investors’ withdrawal of funds from Thailand, affect the baht’s value? Would Blades be affected by the change in value, given the primary Thai customer’s commitment?
9. Assume that Thailand’s central bank wishes to prevent a withdrawal of funds from its country so as to prevent further changes in the currency’s value. How could it accomplish this objective by manipulating interest rates?
10. Construct a spreadsheet illustrating the steps that Blades’ treasurer would need to follow to speculate on expected movements in the baht’s value over the next days. Also show the speculative profit (in dollars) resulting from each scenario. Use both of Holt’s examples to illustrate the possible speculation. Assume that Blades can borrow either million or the baht equivalent of this amount. Furthermore, assume that the following short-term interest rates (annualized) are available to Blades:

Questions length should be around 2-4 sentences and excel spreadsheet for Question 10.