Assume that the Rome Electricity Company (REC) wishes to create a sponsored ADR program worth $300 million to trade its shares on the New York Stock Exchange. Also assume that REC is currently selling on the Borsa Italiana (the Italian Stock Exchange, in Milan) for €29 per share and that the current dollar/euro exchange rate is $1.23/€. American Bank and Trust (ABT) is handling the ADR issue for REC and has advised REC that the ideal trading price for utility company shares on the NYSE is about $71.34 per share (or per ADR).
a.) Assume that REC's stock price rises from €29 to €35 per share. If the exchange rate does not also change, what will happen to REC's ADR price?
= $________ /ADR
b.) If the euro appreciates from $1.23/€ to $1.31/€ but the price of REC's shares remains unchanged in euros, what will happen to REC's ADR price?
= $_________/ ADR