1. Key West Co. exports highly advanced phone sys- tem components to its subsidiary shops on islands in the Caribbean. The components are purchased by consumers to improve their phone systems. These components are not produced in other coun- tries. Explain how political risk factors could ad- versely affect the proﬁtability of Key West Co. 2. Using the information in question 1, explain how ﬁnancial risk factors could adversely affect the proﬁtability of Key West Co. 3. Given the information in question 1, do you expect that Key West Co. is more concerned about the adverse effects of political risk or of ﬁnancial risk? 4. Explain what types of ﬁrms would be most con- cerned about an increase in country risk as a result of the terrorist attack on the United States on Sep- tember 11, 2001. 5. Rockford Co. plans to expand its successful busi- ness by establishing a subsidiary in Canada. How- ever, it is concerned that after 2 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 either of these scenarios has a 15 percent chance of occurring. They have decided to add four percentage points to the project’s re- quired rate of return to incorporate the country risk that they are concerned about in the capital budgeting analysis. Is there a better way to more precisely incorporate the country risk of concern here?
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