Chapter 16, Question 17.

Rip Curl’s country risk analysis

Recently, Rip Curl decided to consider expanding into various foreign
countries; it applied a comprehensive country risk analysis before making its
expansion decisions. Initial screenings of 30 foreign countries were based on
political and economic factors that contribute to country risk. For the
remaining 20 countries where country risk was considered to be tolerable,
specific country risk characteristics of each country were considered. One of
Rip Curl ‘s biggest targets is Mexico, where it plans to build and operate seven
large stores.

1. Identify the political factors that you think may possibly affect the
performance of the Rip Curl stores in Mexico.
2. Explain why the Rip Curl stores in Mexico and in other foreign markets
are subject to financial risk (a subset of country risk).
3. Assume that Rip Curl anticipated that there was a 10 per cent chance
that the Mexican government would temporarily prevent the
conversion of peso profits into Australian dollars because of political
conditions. This event would prevent Rip Curl from remitting earnings
generated in Mexico and could adversely affect the performance of
these stores (from the Australian perspective). Offer a way in which
this type of political risk could be explicitly incorporated into a capital
budgeting analysis when assessing the feasibility of these projects.
4. Offer a way in which this type of political risk could be explicitly
incorporated into a capital budgeting analysis when assessing the
feasibility of these projects.
5. Assume that Rip Curl decides to use Australian dollars to finance the
expansion of stores in Mexico. Second, assume that Rip Curl decides
to use one set of dollar cash flow estimates for any project that it
assesses. Third, assume that the stores in Mexico are not subject to
political risk. Do you think that the required rate of return on these
 projects would differ from the required rate of return on stores built in
Australia at that same time? Explain.
6. Based on your answer to the previous question, does this mean that
proposals for any new stores in Australia have a higher probability of
being accepted than proposals for any new stores in Mexico?