Recently, JCPenny decided to consider expanding into various foreign countrires; it applied a comprehensive country risk analysis before making its expansion decisions. Initial screenings of 30 foreign countries were based on political and economic factors that contribue to country risk. For the remaining 20 countries where country risk was considered to be tolerable, specific country risk characteristics of each country were considered. One of JCPenny's biggest targets is Mexico, where it planed to build and operate seven stores.
A. Identify the political factors that you think may possibly affect the performacne of the JCPenny stores in Mexico.
B. Explain why the JCPenny stores in Mexico and in other foreign markets are subject to financical risk (a subset of country risk)
C. Assume that JCPenny anticipated that there was a 10 percent chance that the Mexican government would temporarily prevent conversion of peso profits into dollars because of political considtions. This event would prevent JCPenny from remitting earnings generated in Mexico and could adversely affect the performance of these stores (from the U.S. perspective).
D. Offer a way in which this type of political risk could be explicitly incorporated into a capital budgeting analysis when assessing the feasibility of these projects.
E. Assume that JCPenny decided to use dollars to finance the expansion of stores in Mexico. Second, assume that JCPenny decides to use one set of dollar cash flow estimates for any project that it assess. Third, assume that the stores in Mexico are not subject to political risk. Do you think that the required rate of return on these projects would differed from the required rate of return on stores built in the United States at the same time? Explain.
F. Based on your answer to the previous question, does this mean that proposals for any new stores in the United States have a higher probability of being accepted than proposals for any new stores in Mexico?