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Indicate whether the statement is true or false.
1. The most reliable way for the capital budgeting analysis to capture country risk is to increase the discount rate for
projects in countries with higher perceived risk.
a.
True
b.
False
2. The weights assigned to factors when assessing country risk should always be higher for the political risk factors than
for the financial factors.
a.
True
b.
False
3. When a government engages in an expansionary fiscal policy, it cuts government spending and raises taxes in order to
reduce its budget deficit.
a.
True
b.
False
4. 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.
a.
True
b.
False
5. If an MNC diversifies its operations internationally to reduce its exposure to any individual country’s problems, country
risk analysis becomes irrelevant.
a.
True
b.
False
6. MNCs try to avoid project finance deals because these deals require the MNC to invest a large amount of its own funds
at the beginning of the project.
a.
True
b.
False
7. 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.
a.
True
b.
False
8. When using a checklist approach to assess country risk, factors should be converted to some numerical forms and
assigned equal weights.
a.
True
b.
False
9. While an overall risk rating of a country can be useful, it cannot always detect upcoming crises.
a.
True
b.
False
10. Macro-assessment of country risk refers to an overall risk assessment of a country without consideration of the MNC‘s
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business.
a.
True
b.
False
11. Higher interest rates tend to increase the growth of an economy and increase the demand for an MNC’s products.
a.
True
b.
False
12. 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.
a.
True
b.
False
13. U.S.-based firms could avoid country risk by simply avoiding international business.
a.
True
b.
False
14. Risk assessors almost always arrive at the same opinion after completing a macro-assessment of country risk.
a.
True
b.
False
15. A blockage of fund transfers imposed by a host government usually forces a subsidiary to donate the funds to the host
government.
a.
True
b.
False
16. 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.
a.
True
b.
False
17. 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.
a.
True
b.
False
18. 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.
a.
True
b.
False
19. 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.
a.
True
b.
False
20. Country risk can affect an MNC‘s cash flows but cannot affect its cost of capital.
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a.
True
b.
False
21. 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.
a.
True
b.
False
22. 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.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
23. 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
24. 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.
25. A micro-assessment of country risk:
a.
is adjusted for the particular business of the firm involved.
b.
excludes aspects unique to a particular firm or project.
c.
is adjusted for the particular business of the firm involved AND excludes aspects unique to a particular firm or
project.
d.
None of these are correct.
26. A macro-assessment of country risk:
a.
is adjusted for the particular business of the firm involved.
b.
excludes aspects unique to a particular firm or project.
c.
is adjusted for the particular business of the firm involved AND excludes aspects unique to a particular firm or
project.
d.
None of these are correct.
27. 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.
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d.
borrow funds from its parent rather than from the host country’s creditors.
28. 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.
29. 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 these are correct.
30. 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 these are examples of political risk.
31. 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 these are correct.
32. 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.
33. If an MNC attempts to build a subsidiary in a country that will take business away from local firms that are protected
by the host government, the host government might do all of the following except:
a.
require the use of local employees for managerial positions.
b.
impose additional taxes.
c.
subsidize the MNC.
d.
subsidize the MNC’s competitors.
34. Country risk assessment should be used when:
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a.
determining whether to establish a subsidiary in a foreign country.
b.
determining whether to continue business in a foreign country.
c.
determining whether to establish a subsidiary in a foreign country AND determining whether to continue
business in a foreign country.
d.
None of these are correct.
35. 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.
36. 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 these are correct.
37. 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 tablet computers in Eurenasia, while MNC B is considering the establishment of a subsidiary to manufacture
tanks there. 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 these are correct.
38. Which of the following is not a form of financial risk?
a.
exchange rate movements
b.
inflation rates
c.
business license requirements imposed on an MNC by the host government
d.
All of these are forms of financial risk.
39. 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 these are strategies to reduce an MNC’s exposure to a host government takeover.
40. A ____ currency may ____ demand for the products exported by the country and therefore reduce the country’s
production and national income.
a.
weak; increase
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b.
weak; reduce
c.
strong; increase
d.
strong; reduce
41. 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.
42. 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.
43. 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
44. The primary purpose of country risk analysis when applied to capital budgeting is usually to measure the effect of
country risk on:
a.
sales.
b.
cash flows.
c.
the consolidated balance sheet.
d.
the consolidated income statement.
45. 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.
46. ____ is(are) not a political risk factor.
a.
High interest rates in a foreign country
b.
Currency inconvertibility
c.
War
d.
Corruption
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47. Country risk analysis is important because it:
a.
focuses on whether to hedge contractual transactions.
b.
focuses on the competitor firms in the industry.
c.
can be used to improve the analysis used to make long-term investing decisions.
d.
All of these are correct.
48. ____ 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 these are forms of political risk.
49. Higher interest rates in a foreign country tend to ____ the growth of the country’s economy and ____ demand for the
MNC’s product.
a.
increase; increase
b.
reduce; reduce
c.
increase; reduce
d.
reduce; increase
50. 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 these are sources for insurance against expropriation.
51. 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.
52. 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.
adjusting the NPV upward if the country risk rating has fallen (implying increased risk) below a benchmark
level AND adjusting the discount rate upward as the country risk rating decreases (implying increased risk).
d.
None of these are correct.
53. 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.
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d.
None of these are correct.
54. ____ involves the collection of independent opinions on country risk without group discussion by the assessors who
provide these opinions.
a.
A checklist approach
b.
Discriminant analysis
c.
Regression analysis
d.
The Delphi technique
55. 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.
country risk analysis should be incorporated within the capital budgeting analysis AND the project with the
highest country risk rating (lowest country risk) should be accepted
56. 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 have the largest direct impact on the subsidiary’s
sales in Germany 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 parent’s cost of capital.
57. Which of the following is not a technique to assess country risk?
a.
Gamma technique
b.
Delphi technique
c.
checklist approach
d.
inspection visits
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52. b
53. c
54. d
55. b
56. c
57. a