Reno, Inc., is considering a project to establish a plant for producing and selling consumer goods in an undeveloped country. Assume that the host country’s economy is very dependent on oil prices, the local currency of the country is very volatile, and the country risk is very high. Also assume that the country’s economic conditions are unrelated to U.S. conditions. Should the required rate of return (and therefore the risk premium) on the project be higher or lower than that of alternative projects in the United States?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 17, Problem 5ST
Textbook Problem

Reno, Inc., is considering a project to establish a plant for producing and selling consumer goods in an undeveloped country. Assume that the host country’s economy is very dependent on oil prices, the local currency of the country is very volatile, and the country risk is very high. Also assume that the country’s economic conditions are unrelated to U.S. conditions. Should the required rate of return (and therefore the risk premium) on the project be higher or lower than that of alternative projects in the United States?

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