Ethics Case 14-0 Debt for equity swaps; have your c.ke and eat it too L014-5g Th

Question

Ethics Case 14-0 Debt for equity swaps; have your c.ke and eat it too L014-5g The cloudy afieenoon mirroced the mood of the conference od diviticn macagers Claude Meye, stat to the coatrolo Hut Manufacturing, weee ose of the gloomy Eaces that were juat emerging feoen the eoeference sooe'wee, I knew as bad, but aot that bad," Claude thou ht to hmielL'1 don't lookfomand to shanng those sumben stshareholder. The numbers he discuned with himself wece fourth quarter losses which more than offiven the profits of the first three quarters. Everyone had knowm for some time that poor sales forecasts and production delays had wreaked havoo “ the bottom line, but most were caught offguard by the wveny of damage. non as Suddenly his mood bryttened. This may wad be udaleu4 though no ote could Latt: that he ut alone in his c ce, scannn1 and rescaturg the Preliminary fameial sta emesta ca his compute bear Fifteen minutes later he congratolated himsel, The next day be eagerly explained hiplan to Sulan Bar coatroller of Hunt for the last ux yea. The plan in obed S300 million . coevertible botdissued three year earier Moyer By swapping stock for the bonds, we can eliminate a subitantial Nabiltymthe balance sheert, wipe out moat of our isnereut expense, and seduce our loss. In fact, the book value of the bonds is iaificantly more than the markes value of the stock we'd issue. I think we can produce a profit Barr: But Claude, our bondholders are mot inclined to coven the bonds Meytr Right But, the bonds are callable, As of this year, we can call the bonds ar a call premium of 1 Oiven the choice of aocepting that redemption price or converting to stock, they"ll all convert We won't have to pay a cent And, since no cach will be paid, we wnpt either Required Do you perceive an etical dilemma? Wst would be the impact of folloming up on Claude's plan? Who would benefit? Who mould be injred?

Explanation / Answer

According to me, the idea proposed by Claude Meyer is completely unethical as the only intent of this is to manipulate financial statements in such a way that the company’s poor performance in the last period could be hidden. 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. Furthermore, this conversion would result in dilution of shares as the conversion would involve issuing new stocks of the company that would also not be favorable to the existing shareholders.

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