The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to thecontroller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conferenceroom. “Wow, I knew it was bad, but not that bad,” Claude thought to himself. “I don’t look forward to sharingthose numbers with shareholders.”The numbers he discussed with himself were fourth-quarter losses which more than offset the profits of the firstthree quarters. Everyone had known for some time that poor sales forecasts and production delays had wreakedhavoc 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 hiscomputer monitor. Suddenly his mood brightened. “This may work,” he said aloud, though no one could hear.Fifteen minutes later he congratulated himself, “Yes!”The next day he eagerly explained his plan to Susan Barr, controller of Hunt for the last six years. The planinvolved $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, wipeout most of our interest expense, and reduce our loss. In fact, the book value 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 bondholders are not inclined to convert the bonds.Meyer: 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. Wewon’t have to pay a cent. And, since no cash will be paid, we won’t pay taxes either.Required:Do you perceive an ethical dilemma? What would be the impact of following up on Claude’s plan? Who wouldbenefit? Who would be injured?
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 faces that were just emerging from the conference
room. “Wow, I knew 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-quarter losses which more than offset the profits of the first
three quarters. Everyone had known for some time that poor sales
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 his mood brightened. “This may work,” he said aloud, though no one could hear.
Fifteen minutes later he congratulated 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
out most of our interest expense, and reduce our loss. In fact, the book
Barr: But Claude, our bondholders are not inclined to convert the bonds.
Meyer: 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 perceive an ethical dilemma? What would be the impact of following up on Claude’s plan? Who would
benefit? Who would be injured?
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