a. Rochester Co. is a U.S. firm that operates a language institute in France. This institute attracts Americans who want to learn the French language. Rochester Co. charges tuition to the American students in dollars. It expects that its dollar revenue from charging tuition will remain stable over each of the next several years. Rochester’s total expenses for this business project are as follows. It rents a facility in Paris and makes a large rent payment each month in euros. It also hires several French citizens as full-time instructors and pays their salary in euros. Rochester Co. expects that its euro-denominated expenses will be stable over each of the next several years. If the euro appreciates against the dollar over time, should this have a favorable effect, an unfavorable effect, or no effect on the value of Rochester Co. Briefly explain.
b. Rochester considers a new project in which it would also attract people from Spain, and the institute in France would teach them the French language. It would charge these students tuition in euros. The expenses for this project would be about the same as those described in part (a) for American students. Assume that euros to be generated by this project would remain stable over the next several years. Assume that this project is about the same size as the project for American students. For either project, the expected annual revenue is just slightly larger than the expected annual expenses. Is the valuation of net cash flows subject to a higher degree of exchange rate risk for this project or for the project for American students? Briefly explain.
