Applied Financial Management

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S. Macs in the United states Increase, decrease, or De unchanged- Explain. ANSWER: It would likely increase because the foreign firms would need to replace heir exporting business with DIF in order to maintain their business in the U. S. 7. Opportunities in Less Developed Countries. Offer your opinion on why economies of some less developed countries with strict restrictions on international trade and DIF are somewhat independent from economies of other countries. Why would Macs desire to enter such countries?

If these countries relaxed their restrictions, would their economies continue to be independent of other economies? Explain. ANSWER: Countries that are unrelated to other economies are desirable because business in these countries would not be subject to existing business cycles in other Mounties. Consequently, an Mac’s overall cash flow may be more stable. However, a typical reason why these countries’ economies are independent of other economies is government restrictions on international trade and DIF. Thus, their economies are insulated from other countries.

Yet, this means that while these countries may be desirable to Macs, they may also be off limits to Macs. If the governments of these countries loosen restrictions, the Macs could enter these countries, but the economies of these countries could no longer be as insulated from the rest of the world. 14. Host Government Incentives for DIF. Why would foreign governments provide Macs with incentives to undertake DIF there? ANSWER: Foreign governments sometimes expect that DIF will provide needed employment or technology for a country. For these reasons, they may provide incentives to encourage DIF.

CHAPTER 16 QUESTIONS 1 . Forms of Country Risk. List some forms of political risk other than a takeover of a subsidiary by the host government, and briefly elaborate on how each factor can affect the risk to the NC. Identify common financial factors for an NC to consider when assessing country risk. Briefly elaborate on how each factor can affect the risk to the NC. ANSWER: Forms of political risk include the possibility of (1) blocked funds, (2) changing tax laws, (3) public revolt against the firm, (4) war, and (5) a changing attitude of the host government toward the NC.

The forms of country risk mentioned here can cause reduced demand for the subsidiary product, higher taxes, or restrictions of fund transfers. Financial factors include inflation, interest rates, GNP growth, and labor costs. These factors can affect the cost of production or revenues to the subsidiary. 4. Diversifying Away Country Risk. Why do you think that an Mac’s strategy of diversifying projects internationally could achieve low exposure to overall country risk?

ANSWER: If the NC can set up foreign projects in countries whose country risk levels are not highly correlated over time, then it reduces the exposure to the possibility of high country risk in all of these areas simultaneously. 5. Monitoring Country Risk. Once a project is accepted, country risk analysis for the foreign country involved is no longer necessary, assuming that no other proposed projects are being evaluated for that country. Do you agree with this statement? Why r why not? ANSWER: Disagree! The country risk must be monitored continuously, since if risk becomes too high, the NC should divest its subsidiaries in that country. Country RISK Analysis. IT ten potential return Is null enough, any degree AT country risk can be tolerated. Do you agree with this statement? Why or why not? Do you think that a proper country risk analysis can replace a capital budgeting analysis of a project considered for a foreign country? Explain. ANSWER: Disagree! If country risk is so high that there is great danger to employees, no expected return is high enough to warrant the project. No. Country risk analysis is not intended to estimate all project cash flows and determine the present value of these cash flows.

It is intended to identify forms of country risk and their potential impact. This is important information for capital budgeting but is not a substitute for capital budgeting. 9. Incorporating Country Risk in Capital Budgeting. How could a country risk assessment be used to adjust a project’s required rate of return? How could such an assessment be used instead to adjust a project’s estimated cash flows? ANSWER: For countries with a lower country risk rating (implying high risk), the rejects required rate of return could be increased (by increasing the discount rate on NP analysis).

To adjust cash flows, consider each key form of country risk and re- estimate cash flows if that form of risk occurs. For example, if the host government may block funds temporarily, estimate the NP of the project if that occurs. Re- estimate the NP for any other forms of country risk as well. This process results in a distribution of possible Nap’s that can be assessed to determine whether a project should be accepted. 10. Reducing Country Risk. Explain some methods of reducing exposure to existing entry risk, while maintaining the same amount of business within a particular country.

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