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. A and B
d. none of the above
ANS: B PTS: 1

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
ANS: A PTS: 1

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
ANS: C PTS: 1

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.
ANS: C PTS: 1

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.
ANS: D PTS: 1

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
ANS: D PTS: 1

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.

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 d. borrow funds from its parent rather than from the host country's creditors.
ANS: C PTS: 1

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.
ANS: D PTS: 1

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
ANS: C PTS: 1

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
ANS: B PTS: 1

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.
ANS: B PTS: 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.
ANS: C PTS: 1

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.

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 ANS: C PTS: 1

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.
ANS: D PTS: 1

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
ANS: B PTS: 1

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.
ANS: B PTS: 1

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.
ANS: C PTS: 1

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
ANS: C PTS: 1

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

a. Exchange rate movements
b. Attitude of consumers in the host country

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 c. Actions of the host government
d. Blockage of fund transfers
e. All of the above are forms of political risk
ANS: A PTS: 1

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
ANS: B PTS: 1

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.
ANS: A PTS: 1

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
ANS: D PTS: 1

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.
ANS: B PTS: 1

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.
ANS: E PTS: 1

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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.
ANS: C PTS: 1

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.
ANS: D PTS: 1

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.
a. True
b. False

ANS: T PTS: 1

28. ____ is not a political risk factor.

a. High interest rates in a foreign country
b. Currency inconvertibility
c. War
d. Corruption
ANS: A PTS: 1

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
ANS: B PTS: 1

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.
ANS: C PTS: 1

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.
a. True
b. False

ANS: T PTS: 1

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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
ANS: A PTS: 1

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
ANS: B PTS: 1

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
ANS: C PTS: 1

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

ANS: F PTS: 1

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
ANS: B PTS: 1

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
ANS: B PTS: 1

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.

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 a. True
b. False

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

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

ANS: F PTS: 1

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.

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 a. True
b. False

ANS: T PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

51. 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

ANS: F PTS: 1

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

ANS: T PTS: 1

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.
a. True
b. False

ANS: T PTS: 1

54. Country risk analysis is important because it:

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in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 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
ANS: D PTS: 1

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.
ANS: C PTS: 1

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.
ANS: E PTS: 1

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.
ANS: B PTS: 1

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