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IFM8e-IM-ch16 - Chapter 16 Country Risk Analysis Lecture...

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Chapter 16 Country Risk Analysis Lecture Outline Why Country Risk Analysis Is Important Political Risk Factors Attitude of Consumers in the Host Country Actions of Host Government Blockage of Fund Transfers Currency Inconvertibility War Bureaucracy Corruption Financial Risk Factors Indicators of Economic Growth Types of Country Risk Assessment Macro-Assessment of Country Risk Micro-Assessment of Country Risk Techniques to Assess Country Risk Checklist Approach Delphi Approach Quantitative Analysis Inspection Visits Combination of Techniques Comparing Risk Ratings Among Countries Measuring Country Risk Variation in Methods of Measuring Country Risk Using the Country Risk Rating for Decision Making Comparing Country Risk Ratings Across Countries Actual Country Risk Ratings Across Countries Incorporating Country Risk in Capital Budgeting Adjustment of the Discount Rate 1
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2 International Financial Management Adjustment of the Estimated Cash Flows How Country Risk Affects Financial Decisions Reducing Exposure to Host Government Takeovers Use a Short-term Horizon Rely on Unique Supplies or Technology Hire Local Labor Borrow Local Funds Purchase Insurance Use Project Finance Impact of an MNC’s Country Risk on Its Value
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Chapter 16: Country Risk Analysis 3 Chapter Theme This chapter attempts to acquaint the student with various forms of risk that must be considered by a multinational corporation. Methods used to assess country risk are defined. It should be emphasized that country risk is often difficult to assess. Furthermore, it may change over time. A firm should incorporate the country risk assessment in its decision of whether to begin (or continue) business in a particular country. If it decides to conduct business there, it should continue to assess country risk as it decides whether to expand in that country. Topics to Stimulate Class Discussion 1. How would you rate the country risk of the U.S.? Would your rating change if you lived in a foreign country? Why? 2. Some people say that you cannot separate the political and financial risk of a country. What does this mean? 3. If you use a country risk rating system based on a scoring range of 0 to 100 (100 representing a very safe country), and Country Z earns a score of 77, are you going to invest in that country? Explain your answer. POINT/COUNTER-POINT: Does Country Risk Matter for U.S. Projects? POINT: No. U.S.-based MNCs should consider country risk for foreign projects only. A U.S.-based MNC can account for U.S. economic conditions when estimating cash flows of a U.S. project or deriving the required rate of return on a project, but it does not need to consider country risk. COUNTER-POINT: Yes. Country risk should be considered for U.S. projects. Country risk can indirectly affect the cash flows of a U.S. project. Consider a U.S. project in which supplies are produced and sent to a U.S. exporter. The demand for the supplies will be dependent on the demand for the exports over time, and the demand for exports over time may be dependent on country risk.
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