75. Devaluation


JAL flight 007 from Tokyo to Chicago leveled out at cruising speed after an uneventful takeoff on a crisp, unusually clear Tokyo morning. David Louis had just finished 10 rough days in Seoul negotiating with Korean government officials. Louis was home based in Chicago but spent one month out of three traveling in the Far East and Latin America. He had been with Willingford since leaving his position as assistant international treasurer at Fibrex Corporation. Recently most of his time was taken up with Willingford’s plans to establish a subsidiary in Korea. Willingford had proposed a 2,000 million won semiconductor manufacturing operation, KOAM Electronics Company in Korea. Negotiations with the Korean government officials had been proceeding well, and Louis was looking forward to a meeting with Willingford’s board of directors at 9:00AM the day after he arrived home.
Louis settled back in the snug luxury of his wide first-class seat and opened his Japan Times on the front page. He could hardly believe what he saw. The headline, KOREAN WON DEVALUATED W484/$ to W580/$. He must have let out an audible gasp because when he looked up a young woman seated next to him was staring at him. “Anything wrong?” she inquired
“Only this” he replied as he held up the headline, completely unprepared for the long whistle the headline elicited from the young woman.
“Will this have some impact on you too?” Louis asked.
“You’d better believe it! I’m the buyer from Midwest Sportswear, Inc., and it will certainly impact my operation and plans for this year’s purchases. How is it going to affect you?”
To Willingford Board of Directors
From: Management Committee
Re KOAM Electronics Company, Prospectus
I After evaluating several potential sites in the Far East and Latin America, We have decided that Korea is the most promising location for our new Semiconductor manufacturing operation.
A. Under current Foreign Investment Promotion Regulations of Korea, our proposed investment is classified as a “recommendable investment project”
B. As a recommendable investment project, it is entitled to favorable treatment including :
1. Favorable tax treatment
2. Government financial assistance
3. Duty-free import of raw materials
4. Protection in the domestic (Korean) market
IJ. Willingford’s proposed equity contribution to KOAM is 1,000 million
Won. Another 1,000 million won provide the other half of the investment and will be borrowed locally in Korea at favorable rates.
what will be the effect of the devaluation on companies initial investment cost?

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