1. Given that Blades expects to use the cash flows generated by the Thai subsidiary to pay the interest and principal of the notes, would the effective financing cost of the baht-denominated notes be affected by exchange rate movements? Would the effective financing cost of the yen-denominated notes be affected by exchange rate movements? How?
2. Construct a spreadsheet to determine the annual effective financing percentage cost of the yen-denominated notes issued in each of the three scenarios for the future value of the yen. What is the probability that the financing cost of issuing yen-denominated notes is higher than the cost of issuing baht-denominated notes?
3. Using a spreadsheet, determine the expected annual effective financing percentage cost of issuing yen-denominated notes. How does this expected financing cost compare with the expected financing cost of the baht-denominated notes?
4. Based on your answers to the previous questions, do you think Blades should issue yen- or baht-denominated notes?
5. What is the tradeoff involved?

MINI CASE

Recall that Blades, Inc., is considering the establishment of a subsidiary in Thailand to manufacture “Speedos,” Blades’ primary roller blade product. Alternatively, Blades could acquire an existing manufacturer of roller blades in Thailand, Skates’n’Stuff. At the most recent meeting of the board of directors of Blades, Inc., the directors voted to establish a subsidiary in Thailand because of the relatively high level of control it would afford Blades. The Thai subsidiary is expected to begin production by early next year, and the construction of the plant in Thailand and the purchase of necessary equipment to manufacture Speedos are to commence immediately. Initial estimates of the plant and equipment required to establish the subsidiary in Bangkok indicate costs of approximately 550 million Thai baht. Since the current exchange rate of the baht is $0.023, this translates to a dollar cost of $12.65 million. Blades currently has $2.65 million available in cash to cover a portion of the costs. The remaining $10 million (434,782,609 baht), however, will have to be obtained from other sources.