Deck 16: Country Risk Analysis

Question 1

12)If a foreign country's consumers tend to only purchase products that are produced locally, the least effective strategy for a U.S. firm is to:

A) use a licensing arrangement with a local firm in that country.
B) enter into a joint venture in that country.
C) develop a subsidiary (under the U.S. name) that manufactures and sells products in that country.
D) develop a subsidiary (under the U.S. name) that manufactures products in that country and exports them to border countries.

Answer 1

C

Question 2

1)A macro-assessment of country risk:

A) is adjusted for the particular business of the firm involved.
B) excludes all aspects relevant to a particular firm or project.
C) A and B
D) none of the above

Answer 2

B

Question 3

9)Country risk assessment should be used when:

A) determining whether to establish a subsidiary in a foreign country.
B) determining whether to continue business in a foreign country.
C) A and B
D) none of the above

Answer 3

C

Question 4

8)Insurance purchased to cover the risk of expropriation ____, and will typically cover ____.

A) will be the same for all firms; only a portion of the firm's total exposure.
B) will be the same for all firms; all of the firm's total exposure.
C) will be dependent on the firm's risk; all of the firm's total exposure.
D) will be dependent on the firm's risk; only a portion of the firm's total exposure.

Question 5

13)An MNC considers direct foreign investment in Germany. It is mainly concerned with the subsidiary's ability to generate sufficient sales there. The country risk characteristic that would best address this concern is:

A) the host government's tax rates charged on remitted earnings.
B) the possibility of blocked funds.
C) the state of the economy in Germany.
D) the possibility of a withholding tax imposed by the German government.

Question 6

3)The Delphi technique:

A) is a method of purchasing information about inspections of the country being evaluated.
B) requires the use of discriminant analysis to assess country risk.
C) involves the collection of independent opinions on country risk.
D) none of the above

Question 7

6)According to the text, country risk analysis has:

A) almost always detected problems before they occur.
B) been effectively used in place of capital budgeting to determine whether a project should be accepted.
C) been perfected as a result of the development of discriminant analysis.
D) none of the above

Question 8

10)When determining whether a particular proposed project in a foreign country is feasible:

A) a country risk rating can adequately substitute for a capital budgeting analysis.
B) country risk analysis should be incorporated within the capital budgeting analysis.
C) the effect of country risk on sales revenue is more important than the effect on cash flows.
D) the project with the highest country risk rating (lowest country risk) should be accepted.
E) B and D

Question 9

2)A micro-assessment of country risk:

A) is adjusted for the particular business of the firm involved.
B) excludes all aspects relevant to a particular firm or project.
C) A and B
D) none of the above

Question 10

16)According to the text, the most appropriate method of incorporating country risk into capital budgeting analysis is to:

A) compare each form of a country risk rating to a benchmark level.
B) estimate the effect of each form of country risk on cash flows.
C) estimate the effect of each form of country risk on the income statement and balance sheet.
D) adjust the discount rate to reflect the level of country risk using the conventional adjustment formula that is used by virtually all MNCs.

Question 11

7)To best reduce exposure to a host government takeover, a subsidiary could:

A) use a long-run profit perspective for business in that country.
B) hire people from its own country (where the parent is located).
C) attempt to obtain supplies from its parent for which substitutes are not available.
D) borrow funds from its parent rather than from the host country's creditors.

Question 12

4)The checklist approach:

A) requires several inspections of the country being evaluated.
B) requires the use of discriminant analysis to assess country risk.
C) requires ratings and weights to be assigned to all factors relevant in assessing country risk.
D) involves the collection of independent opinions on country risk.

Question 13

20)Eurenasia is a country that has frequently been assigned low macro-assessment ratings of country risk in the recent past due to its tendency to war with neighboring nations. MNC A is considering the establishment of a subsidiary to manufacture personal computers, while MNC B is considering the establishment of a subsidiary to manufacture tanks. Which of the two MNCs is likely to be less affected by the low macro-assessment?

A) MNC A.
B) MNC B.
C) both will be equally affected, since the macro-assessment does not vary.
D) none of the above

Question 14

17)The Multilateral Investment Guarantee Agency can provide MNCs implementing direct foreign investment in less developed countries with:

A) insurance that covers losses on multilateral netting procedures.
B) exchange rate risk insurance.
C) political risk insurance.
D) guarantees that MNCs will receive the same taxation treatment by the host government as local firms.
E) guarantees of lines of credit provided by the World Bank if the MNC experiences liquidity problems.

Question 15

14)An MNC has a foreign manufacturing plant to capitalize on cheap production costs; the MNC exports all the goods produced. It should be most concerned about the country's:

A) growth in gross domestic product.
B) government policies designed to increase tariffs on imported goods.
C) local consumer purchasing habits.
D) government environmental regulations and taxes on the lease or purchase of a production site.

Question 16

5)The most important variable in determining a country's degree of overall country risk:

A) is political risk.
B) is financial risk.
C) is the probability of a host government takeover.
D) may often vary with the country of concern.

Question 17

11)The primary purpose of country risk analysis when applied to capital budgeting is usually to:

A) measure the effect of country risk on sales.
B) measure the effect of country risk on cash flows.
C) measure the effect of country risk on the consolidated balance sheet.
D) measure the effect of country risk on the consolidated income statement.

Question 18

15)A firm may incorporate a country risk rating into the capital budgeting analysis by:

A) adjusting the NPV upward if the country risk rating has fallen (implying increased risk) below a benchmark level.
B) adjusting the discount rate upward as the country risk rating decreases (implying increased risk).
C) A and B
D) none of the above

Question 19

18)Country risk analysis is important because it:

A) focuses on whether to hedge contractual transactions.
B) focuses on the competitor firms in its industry.
C) can be used to improve the analysis used to make long-term investing decisions.
D) all of the above

Question 20

19)____ is (are) not a form of political risk.

A) Exchange rate movements
B) Attitude of consumers in the host country
C) Actions of the host government
D) Blockage of fund transfers
E) All of the above are forms of political risk

Question 21

40.Higher interest rates tend to increase the growth of an economy and increase the demand for an MNC's products.

Question 22

28)____ is not a political risk factor.

A) High interest rates in a foreign country
B) Currency inconvertibility
C) War
D) Corruption

Question 23

34)A ____ currency may ____ the volume of products imported by the country and therefore reduce the country's production and national income.

A) weak; increase
B) weak; reduce
C) strong; increase
D) strong; reduce

Question 24

22)The ____ involves the collection of independent opinions on country risk without group discussion by the assessors who provide these opinions.

A) checklist approach
B) discriminant analysis
C) regression analysis
D) Delphi technique

Question 25

30)To make an MNC's operations coincide with its own goal, a host government could do all of the following, except:

A) require the use of local employees for managerial positions.
B) require social facilities.
C) subsidize the MNC.
D) require environmental controls.

Question 26

33)Higher interest rates in a foreign country tend to ____ the growth of an economy and ____ demand for the MNC's product.

A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase

Question 27

27.An MNC must assess country risk not only in countries where it currently does business but also in those where it expects to export or establish subsidiaries.

Question 28

25)MNCs can purchase insurance to cover the risk of expropriation. Which of the following is not a source of this type of insurance?

A) the World Bank.
B) the Overseas Private Investment Corporation (OPIC).
C) the International Monetary Fund (IMF).
D) all of the above are sources for insurance against expropriation.

Question 29

37)Perhaps the most appropriate method for incorporating forms of country risk in a capital budgeting analysis is to estimate how the ____ would be affected by each form of risk.

A) discount rate
B) cash flows
C) opportunity cost
D) none of the above

Question 30

39.A blockage of fund transfers imposed by a host government usually forces a subsidiary to donate the funds to the host government.

Question 31

36)____ involve(s) the collection of independent opinions on country risk without group discussion by the assessors who provide these opinions.

A) The checklist approach
B) The Delphi technique
C) Quantitative analysis
D) Inspection visits

Question 32

32)When the war in Iraq began in 2003, some MNCs feared that oil prices would ____ and that U.S. inflation and interest rates would ____.

A) rise; rise
B) fall; fall
C) rise; fall
D) fall; rise

Question 33

35.Risk assessors almost always arrive at the same opinion after completing a macro-assessment of country risk.

Question 34

31.When a country's currency is inconvertible, the earnings generated by a subsidiary in that country cannot be remitted to the parent through currency conversion.

Question 35

29)A mild form of political risk is a tendency of residents to purchase only:

A) imported products.
B) locally produced products.
C) products produced by MNCs.
D) none of the above

Question 36

24)Which of the following is not a strategy that could be used by an MNC to reduce its exposure to a host government takeover?

A) Attempt to recover cash flows from a foreign investment as quickly as possible
B) Rely on unique supplies and/or technology
C) Hire local labor
D) Borrow local funds
E) All of the above are strategies to reduce an MNC's exposure to a host government takeover.

Question 37

21)Which of the following is not a technique to assess country risk?

A) Gamma technique.
B) Delphi technique.
C) checklist approach.
D) inspection visits.

Question 38

38.Since country risk is constantly changing and events in other parts of the world are largely unpredictable, country risk analysis is not important for MNCs.

Question 39

26)Which of the following is not a way in which country risk analysis can be used?

A) to monitor countries where an MNC is currently doing business.
B) as a screening device to avoid conducting business in countries with excessive risk.
C) to revise an MNC's financing decisions.
D) to determine the degree to which the MNC is exposed to exchange rate movements.

Question 40

23)When quantifying country risk:

A) weights should be equally allocated among factors.
B) weights should be assigned to the political and financial factors according to their perceived importance.
C) it is not generally necessary to construct separate ratings for political and financial risk since these will be equally weighed in the final analysis.
D) the derived factors will be identical for all MNCs conducting business in that country.

Question 41

54)Country risk analysis is important because it:

A) can be used by MNCs as a screening device to avoid countries with excessive risk.
B) can be used by MNCs to monitor countries where the MNC is presently engaged in international business.
C) can be used to improve the analysis used to make long-term investing or financing decisions.
D) all of the above

Question 42

47.The weights assigned to factors when assessing country risk should always be higher for the political risk factors than the financial factors.

Question 43

46.To reduce the exposure to a host government takeover, an MNC may attempt to recover cash flows from the foreign project more quickly or hire local labor.

Question 44

41.When using a checklist approach to assess country risk, factors should be converted to some numerical forms and assigned equal weights.

Question 45

57)Which of the following is probably the best method of incorporating country risk into a capital budgeting analysis?

A) Adjusting the discount rate upward
B) Adjusting the input variables to estimate the sensitivity of the project's NPV
C) Adjusting the political risk rating to obtain a more favorable NPV
D) Country risk should be ignored in capital budgeting, since it is a subjective analysis.

Question 46

50.U.S.-based MNCs could avoid country risk by simply avoiding international business.

Question 47

49.Delphi analysis examines the financial and political factors of various countries and attempts to identify which factors help to distinguish between tolerable-risk and intolerable-risk countries.

Question 48

52.Macro-assessment of country risk refers to an overall risk assessment of a country without consideration of the MNC's business.

Question 49

48.A micro-assessment of country risk involves consideration of all variables that affect country risk except for those unique to a particular firm or industry.

Question 50

51.If an MNC diversifies its operations internationally to reduce its exposure to any individual country's problems, country risk analysis becomes irrelevant.

Question 51

56)Which of the following is not an example of political risk?

A) The Japanese government requires an MNC's subsidiary to install exercise rooms for its employees.
B) The Swiss government requires an MNC's subsidiary to install filters in its manufacturing plants to reduce pollution.
C) Country X, considered for expansion, frequently goes to war with its neighbors.
D) Country Y's government has recently taken over the subsidiary of one of your competitors, another U.S.-based MNC.
E) All of the above are examples of political risk.

Question 52

53.Adjustments to incorporate country risk into the capital budgeting analysis would involve either the addition of a risk premium to the discount rate or a reduction of the cash flows.

Question 53

44.While an overall risk rating of a country can be useful, it cannot always detect upcoming crises.

Question 54

55)Which of the following is not a form of financial risk?

A) Exchange rate movements
B) Inflation rates
C) Blockage of fund transfers
D) All of the above are forms of financial risk.

Question 55

45.Country risk can affect an MNC's cash flows but cannot affect its cost of capital.

Question 56

43.After a project is accepted and implemented, country risk does not need to be monitored; since the project is already established, no further changes can be made.

Question 57

42.Unlike project risk, country risk cannot be incorporated into the capital budgeting analysis of a proposed project by adjustment of the discount rate or by adjustment of the estimated cash flows.