Rockford Co. plans to expand its successful business by establishing a subsidiary in Canada. However, it is concerned that after two years the Canadian government will either impose a special tax on any income sent back to the U.S. parent or order the subsidiary to be sold at that time. The executives have estimated that each of these scenarios has a 15 percent chance of occurring. They have decided to add four percentage points to the project’s required rate of return to incorporate the country risk into the capital budgeting analysis. Is there a better way to more precisely incorporate the country risk of concern here?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 16, Problem 5ST
Textbook Problem

Rockford Co. plans to expand its successful business by establishing a subsidiary in Canada. However, it is concerned that after two years the Canadian government will either impose a special tax on any income sent back to the U.S. parent or order the subsidiary to be sold at that time. The executives have estimated that each of these scenarios has a 15 percent chance of occurring. They have decided to add four percentage points to the project’s required rate of return to incorporate the country risk into the capital budgeting analysis. Is there a better way to more precisely incorporate the country risk of concern here?

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