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 Nantucket's main U.S. office before they depart for Greece. a. Nantucket is privately owned by owners who reside in the United States and work in the main office. Explain possible agency problems associated with the creation of a subsidiary in Athens, Greece. How can Nantucket attempt to reduce these agency costs? I. The employees of the subsidiary in Athens may ask for a higher salary than the company's average, because they possess unique knowledge and skills for Nantucket in Greece, so to reduce this cost the agency should transfer its U.S. employees to Greece. II. The employees of the subsidiary in Athens are not owners, and may manage the tours inefficiently, so Nantucket could attempt to allow the employees a portion of the ownership of the company or may transfer to Athens one of its owners to oversee the subsidiary's operations. III. The subsidiary has no euro (Greece's currency) cash inflows from services provided in Greece but only cash outflows, so it experiences high exchange rate costs to pay rent and salaries. b. Greece's cost of labor and rent are relatively low. Explain why this information is relevant to Nantucket's decision to establish a tour business in Greece. I. The low cost of rent and labor will be beneficial to Nantucket, because it will reduce costs and therefore allow to charge a lower price for all services provided even if it will not will increase the number of clients of the agency. II. The low cost of rent and labor will not be beneficial for Nantucket, because it will attract a large number of competitors to the Greek market and Nantucket's costs will increase rapidly. III. The low cost of rent and labor will be beneficial to Nantucket, because it enables Nantucket to create the subsidiary at a low cost. c. Explain how the cash flow situation of the Greek tour business exposes Nantucket to exchange rate risk. Is Nantucket favorably or unfavorably affected when the euro (Greece's currency) appreciates against the dollar? Explain. Nantucket is affected when the euro appreciates against the dollar because it will require dollars to cover the costs in Athens if the euro's value rises. d. Nantucket plans to finance its Greek tour business. 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 Ioan reduce the exposure of Nantucket to exchange rate risk? Explain. I. Yes. With either type of loan, Nantucket can reduce adverse effect of the appreciation of the euro against the dollar as it increases its funds and therefore has reduced exposure to any type of risk. II. No. With either type of loan, Nantucket is still adversely affected by the appreciation of the euro against the dollar, because each type requires conversion of dollars to euros. III. No. The euro loans used to cover euro expenses will substantially reduce the exposure of Nantucket to exchange rate risk while dollar loans will only increase the exposure