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Chapter 16 Country Risk Analysis 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) both of these. D) neither of these. ANSWER: B 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) both of these. D) neither of these. ANSWER: A 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 these. ANSWER: C 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. ANSWER: C 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. ANSWER: D

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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 these. ANSWER: D 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 if the host government does not cooperate. 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. ANSWER: C 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 ANSWER: D 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) both of these. D) neither of these. ANSWER: C 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) 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. ANSWER: B 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. ANSWER: B

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12. If a foreign country follows the “Purchase Homemade Products” philosophy, the least effective strategy would be for a U.S. firm 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: C 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. ANSWER: C 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. ANSWER: D 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) both of these. D) neither of these. ANSWER: B 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. ANSWER: B

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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. ANSWER: C 18. 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. ANSWER: C 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 these are forms of political risk. ANSWER: A 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 MNC A and MNC B will be equally affected, since the macroassessment does not vary. D) none of these. ANSWER: B 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. ANSWER: A

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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 ANSWER: D 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. ANSWER: B 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 these are strategies to reduce an MNC’s exposure to a host government takeover. ANSWER: E 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 these are sources for insurance against expropriation. ANSWER: C 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. ANSWER: D

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27. _______ is not a political risk factor. A) High interest rates in a foreign country B) Currency inconvertibility C) War D) Corruption ANSWER: A 28. 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. ANSWER: B 29. 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. ANSWER: C 30. 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 ANSWER: A 31. 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 ANSWER: B

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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 ANSWER: C

33.

_______ 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 ANSWER: B

34. 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 these ANSWER: B 35.

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. ANSWER: A

36.

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. ANSWER: A

37.

Risk assessors almost always arrive at the same opinion after completing a macroassessment of country risk. A) true. B) false. ANSWER: B

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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. A) true. B) false. ANSWER: B 39. 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. ANSWER: B 40. Higher interest rates tend to increase the growth of an economy and increase the demand for an MNC’s products. A) true. B) false. ANSWER: B 41. 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. ANSWER: B 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. A) true. B) false. ANSWER: B 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. A) true. B) false. ANSWER: B 44. While an overall risk rating of a country can be useful, it cannot always detect upcoming crises. A) true. B) false. ANSWER: A

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45. Country risk can affect an MNC’s cash flows but cannot affect its cost of capital. A) true. B) false. ANSWER: B 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. A) true. B) false. ANSWER: A 47. The degree to which foreign MNCs were affected by the Asian crisis suggests that country risk analysts did not detect some of the potential problems in these countries. A) true. B) false. ANSWER: A 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. A) true. B) false. ANSWER: B 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. A) true. B) false. ANSWER: B