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Assessment of Cost of Capital

1. Blades' cost of capital will likely be higher than domestic roller blade manufacturers when expanding into Thailand due to higher risks from operating in a foreign country with economic uncertainty and currency exchange rate volatility. 2. According to the CAPM, Blades' required rate of return would increase when expanding to Thailand due to higher risk. However, this may not accurately capture the full risks and the cash flows of the Thai subsidiary should be discounted using a higher rate to determine its NPV. 3. If Blades borrows funds in Thailand, its overall cost of capital will increase due to higher interest rates in Thailand.

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M Bilal Saleem
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46 views1 page

Assessment of Cost of Capital

1. Blades' cost of capital will likely be higher than domestic roller blade manufacturers when expanding into Thailand due to higher risks from operating in a foreign country with economic uncertainty and currency exchange rate volatility. 2. According to the CAPM, Blades' required rate of return would increase when expanding to Thailand due to higher risk. However, this may not accurately capture the full risks and the cash flows of the Thai subsidiary should be discounted using a higher rate to determine its NPV. 3. If Blades borrows funds in Thailand, its overall cost of capital will increase due to higher interest rates in Thailand.

Uploaded by

M Bilal Saleem
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Assessment of Cost of Capital

1. If Blades expands into Thailand, do you think its cost of capital will be higher or lower than
the cost of capital of roller blade manufacturers operating solely in the United States?
Substantiate your answer by outlining how Blades’ characteristics distinguish it from domestic
roller blade manufacturers.2. According to the CAPM, how would Blades’ required rate of return
be affected by an expansion into Thailand? How do you reconcile this result with your answer to
question 1? Do you think Blades should use the required rate of return resulting from the CAPM
to discount the cash flows of the Thai subsidiary to determine its NPV?3. If Blades borrows
funds in Thailand to support its Thai subsidiary, how would this affect its cost of capital? Why?4.
Given the high level of interest rates in Thailand, the high level of exchange rate risk, and the
high (perceived) level of country risk, do you think Blades will be more or less likely to use debt
in its capital structure as a result of its expansion into Thailand? Why?
MINI CASE

Recall that Blades has tentatively decided to establish a subsidiary in Thailand to manufacture
roller blades. The new plant will be utilized to produce “Speedos,” Blades’ primary product.
Once the subsidiary has been established in Thailand, it will be operated for 10 years, at which
time it is expected to be sold. Ben Holt, Blades’ chief financial officer (CFO), believes the
growth potential in Thailand will be extremely high over the next few years. However, his
optimism is not shared by most economic forecasters, who predict a slow recovery of the Thai
economy, which has been very negatively affected by recent events in that country.
Furthermore, forecasts for the future value of the baht indicate that the currency may continue
to depreciate over the next few years.

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Assessment of Cost of Capital
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