The cloudy afternoon mirrored the mood of the conference of division managers. C

Question

The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy facess that were just emerging from the conference room. " wow, I know it was bad, but not that bad" claude thought to himself. " I don't look forward to sharing those numbers with shareholders. The numbers he discussed with himself were fourth quater losses which more than offset the profits of the first three quaters. Everyone had known for some time that poor sales forecast and production delays had wreaked havoc on the bottom line, but most were caught off guard by the severity of damage.

Later that night he sat alone in his office, scanning and rescanning the preliminary financial statements on his computer monitor. suddenly is mood brightended. this may work. he said aloud, though no one could hear fifteen minutes later he congraluted himself. "yes". The next day he eagerly explained his plan to susan barr, controller of Hunt for the last six years. The plan involved $300 million in convertible bonds issued three years earlier.

Meyer: by swapping stock for the bonds, we can eliminate a substantial liability from the balance sheet, wipe out the most of our interest expense and reduce our loss. In fact, the book balue of the bonds is significantly more than the market value of the stock we'd issue. I think we can produce a profit.

Barr: But claude, our bondholder are not inclined to convert the bonds.

Meyers: Right. but the bonds are callable. as of this year, we can call the bonds at a call premium of 1%. Given the choice of accepting that redemption price or converting to stock, they'll all convert. we won't have to pay a cent. and, since no cash will be paid, we won't pay taxes either.

Required: Do you percieve an ethical dilemma? what would be the impact of following up on Claude's plan? Who would benefit? who would be injured?

Explanation / Answer

Do you perceive an ethical dilemma? What would be the impact of following up on Claudes plan? Who would benefit? Who would be injured?

In my opinion this idea Mr. Meyer has is very unethical. By switching up the bonds he will temporarily make the books look good but they will not be accurate because it is only for the period. His ideas should actually be in how can they increase sales and productivity and not in how to change the numbers to make them look good. Companies sometimes try to induce conversions but Mr. Barr clearly told him that bond holders are not inclined to convert the bonds. I believe that the company and the shareholders are the ones that will be injured if they do what Mr. Meyer is hoping because they will think that they are doing a lot better than they actually are. Once they see the numbers and compare them to previous periods they will believe that they did much better than they did and that sales went up when in reality they went down.

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