Lachgar Industries develops and produces bio diesel, an alternative energy sourc
ID: 2441907 • Letter: L
Question
Lachgar Industries develops and produces bio diesel, an alternative energy source. Thecompany has an outstanding $200,000,000, 30-year, 12% bond issue dated July 1, 2005.
The bond issue is due June 30, 2035. The bond indenture requires a bond sinking fund,
which has a balance of $24,000,000 as of July 1, 2010. The company is currently experiencing
a shortage of funds due to a recent acquisition. Abdou Hatch, the company’s
treasurer, is considering using the funds from the bond sinking fund to cover payroll
and other bills that are coming due at the end of the month. Abdou’s brother-in-law is
a trustee in a sinking fund, who has indicated willingness to allow Abdou to use the
funds from the sinking fund to temporarily meet the company’s cash needs.
Discuss whether Abdou’s proposal is appropriate.
Explanation / Answer
A Bond sinking fund is a Fund or an account into which an issuer deposits money on a regular basis in order to repay a bond that will come in the future .
Hence utilizing that fund for some other purpose not at all related to Bonds is not ethical.
Abdou’s proposal is not at all appropriate.
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