IBUS 401- EXAM 3 – EOCQS
CORRECT 100%
Ch:16.1
Forms of Country Risk
List some forms of political risk other than a takeover of a subsidiary by the host
government, and briefly elaborate on how each factor can affect the risk to the MNC.
Identify common financial factors for an MNC to consider when assessing country risk.
Briefly elaborate on how each factor can affect the risk to the MNC. - ANSWER Forms
of political risk include the possibility of:
(1) blocked funds
(2) changing tax laws
(3) public revolt against the firm
(4) war
(5) a changing attitude of the host government toward the MNC.
The forms of country risk mentioned here can cause reduced demand for the
subsidiary's product, higher taxes, or restrictions of fund transfers.
Financial factors include inflation, interest rates, GNP growth, and labor costs. These
factors can affect the cost of production or revenues to the subsidiary
Ch:16.2
Country Risk Assessment
Describe the steps involved in assessing country risk once all relevant information has
been gathered. - ANSWER (1) A rating must be assigned to each factor.
(2) A weight must be assigned.
(3) The weighted ratings can be consolidated to derive an overall political risk and
financial risk rating, and (if desired) an overall country risk rating.
Ch:16.6
Country Risk Analysis
If the potential return is high enough, any degree of country risk can be tolerated.
Do you agree with this statement? Why or why not?
, Do you think that a proper country risk analysis can replace a capital budgeting analysis
of a project considered for a foreign country? - ANSWER Disagree! If country risk is so
high that there is great danger to employees, no expected return is high enough to
warrant the project.
No. Country risk analysis is not intended to estimate all project cash flows and
determine the present value of these cash flows. It is intended to identify forms of
country risk and their potential impact. This is important information for capital budgeting
but is not a substitute for capital budgeting.
Ch:16.9
Incorporating Country Risk in Capital Budgeting
How could a country risk assessment be used to adjust a project's required rate of
return?
How could such an assessment be used instead to adjust a project's estimated cash
flows? - ANSWER For countries with a lower country risk rating (implying high risk), the
project's required rate of return could be increased (by increasing the discount rate on
NPV analysis).
To adjust cash flows, consider each key form of country risk and re estimate cash flows
if that form of risk occurs. For example, if the host government may block funds
temporarily, estimate the NPV of the project if that occurs. Re estimate the NPV for any
other forms of country risk as well. This process results in a distribution of possible
NPVs that can be assessed to determine whether a project should be accepted.
Ch:13.1
Motives for DFI
Describe some potential benefits to an MNC as a result of direct foreign investment
(DFI).
Which motives for DFI do you think encouraged Nike to expand its footwear production
in Latin America? - ANSWER Regarding Nike's motives, Latin America offers additional
sources of demand, as Latin American consumers have shown an interest in Nike
footwear (this is partially due to increased marketing targeted to Latin American
markets).
Second, Nike may be able to produce their athletic footwear at relatively low costs in
some Latin American countries, as the production is labor-intensive and wages are low.
CORRECT 100%
Ch:16.1
Forms of Country Risk
List some forms of political risk other than a takeover of a subsidiary by the host
government, and briefly elaborate on how each factor can affect the risk to the MNC.
Identify common financial factors for an MNC to consider when assessing country risk.
Briefly elaborate on how each factor can affect the risk to the MNC. - ANSWER Forms
of political risk include the possibility of:
(1) blocked funds
(2) changing tax laws
(3) public revolt against the firm
(4) war
(5) a changing attitude of the host government toward the MNC.
The forms of country risk mentioned here can cause reduced demand for the
subsidiary's product, higher taxes, or restrictions of fund transfers.
Financial factors include inflation, interest rates, GNP growth, and labor costs. These
factors can affect the cost of production or revenues to the subsidiary
Ch:16.2
Country Risk Assessment
Describe the steps involved in assessing country risk once all relevant information has
been gathered. - ANSWER (1) A rating must be assigned to each factor.
(2) A weight must be assigned.
(3) The weighted ratings can be consolidated to derive an overall political risk and
financial risk rating, and (if desired) an overall country risk rating.
Ch:16.6
Country Risk Analysis
If the potential return is high enough, any degree of country risk can be tolerated.
Do you agree with this statement? Why or why not?
, Do you think that a proper country risk analysis can replace a capital budgeting analysis
of a project considered for a foreign country? - ANSWER Disagree! If country risk is so
high that there is great danger to employees, no expected return is high enough to
warrant the project.
No. Country risk analysis is not intended to estimate all project cash flows and
determine the present value of these cash flows. It is intended to identify forms of
country risk and their potential impact. This is important information for capital budgeting
but is not a substitute for capital budgeting.
Ch:16.9
Incorporating Country Risk in Capital Budgeting
How could a country risk assessment be used to adjust a project's required rate of
return?
How could such an assessment be used instead to adjust a project's estimated cash
flows? - ANSWER For countries with a lower country risk rating (implying high risk), the
project's required rate of return could be increased (by increasing the discount rate on
NPV analysis).
To adjust cash flows, consider each key form of country risk and re estimate cash flows
if that form of risk occurs. For example, if the host government may block funds
temporarily, estimate the NPV of the project if that occurs. Re estimate the NPV for any
other forms of country risk as well. This process results in a distribution of possible
NPVs that can be assessed to determine whether a project should be accepted.
Ch:13.1
Motives for DFI
Describe some potential benefits to an MNC as a result of direct foreign investment
(DFI).
Which motives for DFI do you think encouraged Nike to expand its footwear production
in Latin America? - ANSWER Regarding Nike's motives, Latin America offers additional
sources of demand, as Latin American consumers have shown an interest in Nike
footwear (this is partially due to increased marketing targeted to Latin American
markets).
Second, Nike may be able to produce their athletic footwear at relatively low costs in
some Latin American countries, as the production is labor-intensive and wages are low.
