Question 1

____ is(are) not a political risk factor.

Accepted Answer

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

Question 2

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

Accepted Answer

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. 
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 3

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

Accepted Answer

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. 
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 4

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

Accepted Answer

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

Question 5

Country risk assessment should be used when:

Accepted Answer

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 
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

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is not a form of financial risk?​

Accepted Answer

A) exchange rate movements 
B) inflation rates 
C) business license requirements imposed on an MNC by the host government 
D) All of the above are forms 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 the above are forms of financial risk.

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

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. 
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 14

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:​

Accepted Answer

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. 
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 15

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

Accepted Answer

A) True 
 B)False

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

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. 
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 18

The Delphi technique:​

Accepted Answer

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 
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 19

When quantifying country risk:​

Accepted Answer

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. 
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 20

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

Accepted Answer

A) True 
 B)False

Exam 16: Country Risk Analysis

____ is(are) not a political risk factor.

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

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

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

Country risk assessment should be used when:

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.

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.

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

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.

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.

Which of the following is not a form of financial risk?​

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.

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

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:​

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

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.

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

The Delphi technique:​

When quantifying country risk:​

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

Multinational Financial Management: An Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

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

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

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

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

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:

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

The Delphi technique:

When quantifying country risk: