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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