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Blades, Inc.

Case

Sirisha Prasanna
Purba Mukherjee
Smita Wardhan
Soumya Sucharita Mahapatra
Suchanda Som
Case Facts
 US based roller blade manufacturer
 Period of operation- 10 years
 Speedos
 NPV= $8 mn @ 25% (conservative approach)
 Total risk= Unsystematic + Systematic
 IR (Thai)=15%, IR (US)= 8%
 Rf= 5%, Rm=12%
 Cost of D and E higher in Thailand
Case background
 South East Asian Financial Crisis- 1997-98
 Recovery
 Tourist-
1. High growth potential
2. Lack of competitors
 Volatile Bhat (Thiland Currency )
 Systematic Risk – equity risk ,interest rate risk ,
commodity risk.
 Unsystematic Risk-country risk(mutual fund ,shares
,debenture) , exchange rate risk
Q1- If Blades expands into Thailand…

 Favorable- Default risk reduced


 Unfavorable-
1. Smaller size than MNCs- won’t receive preferential
treatment
2. Higher interest rate in Thailand
3. Translation exposure
4. Country risk
5. Unsystematic risk increases- diversified
Q2- Capital Asset Pricing Model…
 When Beta=2, Ke= 19%
 When Beta= 1.8, Ke= 17.6%
 Expansion-> reduces systematic risk
 Usage of 25% required ROR considering unsystematic
risk in Thailand
WACC for financing the project Ke= 19%
Combinations US cost of debt= Thailand cost of US cost of Approximated
8% debt= 15% equity= 19% WACC

50% US debt 50%*8%= 4% --------------------- 50%*19%= 9.5% 13.5%


50% US equity

20% US debt 20%*8%= 1.6% 30%*15%= 4.5% 50%*19%= 9.5% 15.6%


30% Thai debt
50% US equity

50% US equity --------------------- 50%*15%= 7.5% 50%*19%=9.5% 17%


50% Thai debt

40% Thai debt --------------------- 40%*15%= 6% 60%*19%= 17.4%


60% US equity 11.4%
WACC for financing the project Ke= 17.6%
Combinations US cost of debt= Thailand cost of US cost of Approximated
8% debt= 15% equity= 17.6% WACC

50% US debt 50%*8%= 4% --------------------- 50%*17.6%= 12.8%


50% US equity 8.8%

20% US debt 20%*8%= 1.6% 30%*15%= 4.5% 50%*17.6%= 14.9%


30% Thai debt 8.8%
50% US equity

50% US equity --------------------- 50%*15%= 7.5% 50%*17.6%= 16.3%


50% Thai debt 8.8%

40% Thai debt --------------------- 40%*15%= 6% 60%*17.6%= 16.56%


60% US equity 10.56%
WACC with risk differential
 Risk premium= 12%-5%= 7%
 Lowest WACC before investing in Thailand= 13.5%
 Required rate of return= (13.5+7)%= 20.5%
 Lowest WACC after investing in Thailand= 12.8%
 Required rate of return= (12.8+7)%= 19.8%
Characteristic
Characteristic Lines
Lines And
And
Different
Different Betas
Betas

EXCESS RETURN Beta > 1


ON STOCK (aggressive)
Beta = 1
Each characteristic
line has a Beta < 1
different slope. (defensive)

EXCESS RETURN
ON MARKET PORTFOLIO
Q3- Raising debt in Thailand…
Option for Debt Financing- borrow dollar US market and
convert it into bhatt or borrow bhatt from Thai market.
 Interest rate higher in Thailand than that in US
 International Fisher effect is applicable
 Higher cost of debt but will depriciate over the year
offseated by the reduce exposure to adverse exchange rate
effect.(10 year project and high political and currency risk)
 Q4- Use of debt…
 Advantages-
 Advantages-
1.
1. High
High country
country risk-
risk- possibility
possibility for
for hedging
hedging
2.
2. Future
Future depreciation->increase
depreciation->increase profit
profit of
of company
company

 Disadvantage-
Disadvantage-
1.
1. Increase
Increase in
in cost
cost of
of capital
capital
Financing with Baht when it is weak
Year 1 Year 2 Year 3

Payment in Thai 1500 B 1500 B 11500 B


baht

Forecasted 0.0303 0.0294 0.0286


exchange rate of
baht

Payments in 45.45 44.1 328.9


dollar
Yield curve in Thailand
Thank You!!

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