Recently, Best Bargain Co$.,$ a U$.$S$.-$based retailer, decided to consider expanding into various foreign countries; 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 contribute 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 Best Bargain's biggest targets is Mexico, where it planned to build and operate seven large stores.

Assume that Best Bargain decides to use dollars to finance the expansion of stores in Mexico. Second, assume that Best Bargain decides to use one set of dollar cash flow estimates for any project that it assesses. 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 differ from the required rate of return on stores built in the United States at that same time? Explain.

$-$Select$-$NoYesItem $1.$ As there is no political risk, only financial risk will affect the evaluation of projects. As the Mexican economy $-$Select$-$is more volatile thanis less volatile thanhas the same volatility asItem $2$ the U$.$S$.$ economy, the required rate of return on new stores in Mexico is expected to be $-$Select$-$higher thanlower thanthe same asItem $3$ in the U$.$S$.$