GF581 Unit 10 Thai Operation Global Finance Strategy Example

Build the Second Line, Under Five Standing Rules: A Unit 10 Global Finance Strategy Report for a Thai Operation

[Student Name]

Purdue University Global

GF581: Financial Strategies for a Global Environment

Unit 10 Global Finance Strategy Report

[Instructor Name]

[Date]

The membrane maker, its Thai subsidiary and every figure are composite and illustrative, carried from earlier units; the articles and textbook cited are real.

Summary

Build the second line. Three figures support the decision: roughly $4.86 million of value to the Milwaukee parent when its dollar cash is discounted at 9.5 percent, a 16.3 percent internal rate of return on cash remitted to Milwaukee, and a break-even at which the baht would have to weaken about 3.67 percent a year for five years before the line destroyed value. Fund it with 240 million baht borrowed in Thailand and a $4.71 million loan from the parent. Adopt the five standing policies below.

Section 1: The Investment

Costing 680 million baht in equipment plus a working capital build of 40 million, the line adds capacity for industrial membrane elements sold across Southeast Asia. Valued from the subsidiary's side in baht, it is worth about 263.8 million baht, or $7.76 million. Measured instead as dollar dividends reaching Milwaukee, net of the 10 percent tax Thailand withholds and converted at forward rates, it is worth about $4.86 million. The parent's figure governs, because the parent's shareholders bear the decision (Shapiro, 1978).

Section 2: Country Risk

Five channels were assessed. The most valuable to protect is the Board of Investment's three-year tax exemption, worth about $1.43 million of parent value. Others, including government discontinuity, convertibility, flood disruption to suppliers and rising labor costs, are handled in the cash flows or by specific protections rather than by adding a premium to the discount rate (Bekaert et al., 2016).

Section 3: Standing Policies

Policy 1, hedging contracted exposures. Contracted foreign-currency receivables and payables above $500,000 are hedged with forwards when they fall due within six months. The money market alternative may be used when credit lines allow and the cost is lower.

Policy 2, hedging uncertain exposures. Exposures that may not arise, such as tender bids, are hedged only with options, never with forwards, so that losing the bid cannot create a currency loss larger than the premium.

Policy 3, funding by currency. Each subsidiary's debt is held in the currencies of its revenue, in proportion to the revenue mix. For Rayong, that means about 60 percent baht and 40 percent dollars, reviewed annually.

Policy 4, dividends. The Thai subsidiary pays dividends twice a year, at least 60 percent of its prior half-year's earnings, so that cash does not accumulate in baht and remittance risk stays small.

Policy 5, translation. Translation adjustments are reported clearly as non-cash and are not hedged. The company will seek to exclude them from the definition of tangible net worth in its loan agreement, removing the one place they could matter.

Each policy answers a lesson from earlier work: forwards fit contracted exposures, options fit uncertain ones, local debt protects the parent from a falling baht, regular dividends limit remittance risk and leaving translation unhedged avoids spending cash to steady an accounting figure.

Section 4: Funding

The baht loan's expected dollar cost, about 5.94 percent, is close to the parent's 5.60 percent, so cost alone does not decide the choice. The split matches the plant's revenue: baht debt repaid from baht sales, dollar debt from dollar sales. Firms in East Asia that matched foreign debt to foreign revenue fared far better in the 1997 crisis than those that did not (Allayannis et al., 2003).

Section 5: What Would Undo the Case

The line remains valuable unless the baht weakens by more than about 3.67 percent a year for five years, roughly a 17 percent cumulative fall, or the tax exemption is lost before construction. The first is not impossible: in 1997 the baht lost half its value in six months. But the plant's natural hedges, dollar export sales and local debt, would soften the blow, and the break-even assumes no response from management, such as shifting more sales to export markets.

Section 6: Monitoring

The treasury will report quarterly to the chief financial officer on the baht against its break-even path, hedge coverage against Policy 1, the subsidiary's debt-service coverage, and dividends paid against Policy 4. A sustained baht depreciation of more than 3 percent a year for two consecutive years will trigger a review of the line's operating plan.

Section 7: Governance and Tax

Intercompany loans and service charges will be documented on arm's-length terms to meet Thai and U.S. transfer pricing rules. Tax counsel will compare the withholding treatment of dividends and intercompany interest under the treaty before the first remittance (Eiteman et al., 2016).

Section 8: Alternatives Considered

Two alternatives were rejected. Expanding in Milwaukee and exporting to Asia would avoid currency and country risk but would raise freight costs and lose the Thai tax incentive, leaving a lower value than the Rayong line under every scenario tested. Leasing capacity from a Thai contract manufacturer would avoid the capital outlay but would expose the company's membrane technology to a third party and give up control of quality, which customers in desalination value highly.

Section 9: Timeline

The Board of Investment application will be filed this quarter. Equipment will be ordered only after the certificate is granted, expected within four months. Construction and commissioning will take about nine months, so the line should begin production about fourteen months from approval. The baht loan will be drawn in stages as equipment is delivered, matching borrowing to spending.

Section 10: Expected Effect on the Group

Once running, the line should add about 95 million baht of operating income in its first year, about $2.8 million at the forward rate, roughly 3 percent of group operating income. It will raise the share of group earnings from Thailand from about 9 to about 12 percent, which increases the importance of the baht policies above.

Section 11: Communication With the Plant

The Rayong managers will be judged on baht results at the budget exchange rate, leaving exchange rate swings as the treasury's responsibility. This keeps their incentives aligned with what they control, the point raised in the first unit's discussion, while the parent's dollar results are reported separately to the board.

Section 12: Review Date

The strategy will be reviewed in full in twelve months, or sooner if the baht crosses its break-even path or the Board of Investment changes its incentive terms.

Decisions Requested

Approve the second Rayong line, the funding split, and the five standing policies.

References

Allayannis, G., Brown, G. W., & Klapper, L. F. (2003). Capital structure and financial risk: Evidence from foreign debt use in East Asia. The Journal of Finance, 58(6), 2667-2710. https://doi.org/10.1046/j.1540-6261.2003.00619.x

Bekaert, G., Harvey, C. R., Lundblad, C. T., & Siegel, S. (2016). Political risk and international valuation. Journal of Corporate Finance, 37, 1-23. https://doi.org/10.1016/j.jcorpfin.2015.12.007

Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2016). Multinational business finance (14th ed.). Pearson.

Shapiro, A. C. (1978). Capital budgeting for the multinational corporation. Financial Management, 7(1), 7-16. https://doi.org/10.2307/3664902