1) With the conversion of the net-baht cash flows to Australia Dollars, the Aussie Blades, Pty Ltd. Is not liable to undergo any depreciation in future time period that will lead to any reduced cashflows in dollars. People will hardly need to borrow sum from bank, at higher interest rates which will cause the amount of cash available in the market will be less. Consequently, it will lead the Thai Baht’s value to reduce thus making it bad for conversion of the Baht any other currency at the time. It will become beneficial, to wait for some period of time letting the Thai Baht to increase by the decrease in the interest rates.
So, investment should be done when the interest rates are more, and, there is appreciation of the currency. Based on the theory, Aussie Blades, Pty Ltd. Should make an investment its surplus finds as the rate of interest is high in Thailand even though, the increased rates are because of the economic instability in the country. This will make us want to hold the investment for at least period of one year. On the other hand, if the firm invests in Australia then they can regain the money soon though at an interest rate that is lower. This is a trade of between the interest rates & the currency.
2) With use of the cashflows generated in Thailand towards the support for the operations in Australia, there will be a need to borrow extra funds at a rate of interest at 10% (Based on the assumption that Aussie Blades is currently paying 10 per cent on Australian dollars borrowed and needs more financing for the company). For instance, with a depreciation of the Baht by 10% over the next year – the investment in Thailand will generate a sum of approximately 5%, whereas the firm will be required to pay 10% over the consecutive year towards the borrowed funds. As the amount could be immediately converted into Australian Dollars and were used for the operations in Australia, it should be converted for decreasing the additional interest that will be added by doing so.
Revenue 180,000*4594 = THB 826920000
CGS 72000*2871 = THB 206712000
Net Revenue from Thailand =THB 620208000These net revenues received from Thailand if again invested in Thailand instead of USA then as it has already done financing form USA @ 10% so it would need further loan to continue the operations in USA.
Thus, Aussie Blades, will require to get additional fund through borrowing as the cash flow generated in Thailand is utilized towards supporting operations in Australia. Conversion of the Thai Baht as stated above will ensure that there will be better interest rates anticipated. With a depreciation in Baht at 10%, the investment shall generate a 5% yield. It will cause Aussie Blades to pay interest rate of 10% on the funds that would be borrowed in Australia.
3) With a possibility of borrowing funds by Aussie Blades, Pty Ltd at a rate of 8% interest – the firm should make a prospective investment in Thailand at the 8% respectively and make fund borrowed at interest rates that is lower. The firm can borrow funds at 8% (whereas the current rate of interest rate is 10%. The use of excess funds by Aussie Blades, Pty Ltd. Should be directed towards supporting its Australian operations in the country instead of borrowing additional funds.
Spread Sheet Analysis:
(***Spreadsheet analysis in excel)
Based on the expected spot rate for baht as relative to Ben-Holts Plan and immediate conversion calculations done in spreadsheet – the Plan 1 cash flow generate for a period of one year is more as compared to Plan 2 for immediate conversion by a difference in converted Australian dollars by a sum of $23,518,759. So, based on the higher amount of cash flows generated, the Plan 1 i.e. Ben Holt's plan should be implemented. Thus, comparing the choice of investing the funds versus using the funds to provide needed for financing to the company, Aussie Blades, Pty Ltd should invest funds in Thailand for one year as well as make fund borrowing at 10% interest rate to support the Australian operations.
4) The difference between the Thai baht interest rate (15 per cent) and the Australian dollar interest rate (8 per cent) is 7 per cent. With an anticipation that there will be appreciation for Thai Baht against USD, the currency will most likely depreciate to equalize the advantage gained. Still, the amount generated is high at Plan 1 of Ben Holt. The relative difference of Thai Baht interest data is a meager percent.
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