21      Impact of international business on cash flows and risk. Slowman Travel Agency specializes in tours for American tourists. Until recently all of its business was in Switzerland. It has just established a subsidiary in Athens, Greece, which provides tour services in the Greek islands for American tourists. It rented a shop near the port of Athens. It also hired residents of Athens, who could speak English and provide tours of the Greek islands. The subsidiary’s main costs are rent and salaries for its employees and the lease of a few large boats in Athens that it uses for tours. American tourists pay for the entire tour in dollars at Slowman’s US office before they depart for Greece.

a    Explain why Slowman may be able to effectively capitalize on international opportunities such as the Greek island tours.

b   Slowman is privately owned by owners who reside in Switzerland and work in the main office. Explain possible agency problems associated with the creation of a subsidiary in Athens, Greece. How can Slowman attempt to reduce these agency costs?

c    Greece’s cost of labour and rent are relatively low. Explain why this information is relevant to Slowman’s decision to establish a tour business in Greece.

d   Explain how the cash flow situation of the Greek tour business exposes Slowman to exchange rate risk. Is Slowman favourably or unfavourably affected when the euro (Greece’s currency) appreciates against the dollar? Explain.

e    Slowman plans to finance its Greek tour busi- ness. Its subsidiary could obtain loans in euros from a bank in Greece to cover its rent, and its main office could pay off the loans over time. Alternatively, its main office could borrow dollars and would periodically convert dollars to euros to pay the expenses in Greece. Does either type of loan reduce the exposure of Slowman to exchange rate risk? Explain.

f     Explain how the Greek island tour business could expose Slowman to country risk.