In regards to Ch. 9 , 5 AP problem- The Tony Hawk Skate Park was built in early

Question

In regards to Ch. 9 , 5 AP problem-
The Tony Hawk Skate Park was built in early 2010. The construction was financed by $10 million of 5% bonds issued at face value, due in 10 years, with interest payable on June 30 and December 31 each year. The park did well initially, reporting net income in both 2010 and 2011. However, the discussion at the executive board meeting in late 2012 focused on falling skate-park revenues and increasing maintenance expenses. While several ideas were proposed, Jim Trost, the VP of finance, had an intriguing short-term solution. Jim stated, “Interest rates have steadily climbed the past three years. At the current market interest rate of 9%, we could repurchase our bonds for just under $8 million, recording a gain of over $2 million on the repurchase. We could then reissue new bonds at the current 9% rate.”

What would be the answer to question #3? #3 asks:
"Is it ethical to time the repurchase of bonds in 2012 in order to include a $2 million gain on repurchase in a bad year? What if the transaction is fully disclosed?"

Explanation / Answer

By repurchasing own bonds firm will earn margin of $2 million that amount can be used against increasing maintenance expenses but in the bad year this is not ethical at all because how the firm will arrange finance for repurchasing these bonds.

Another point is this repurchasing transaction will also create an extra burden of interest payment that will be from 5 to 9%.

After this transaction cost of interest may be higher than present level because bad condition of the firm will raise the level of risk among the investors.

How the firm will arrange finance for rising interest payment, if condition remain bad for some years.

This repurchasing transaction will also raise some transactional cost for the firm in bad time.

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