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    Corporate ethics senario concerning risky investments

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    You are the CFO of a company that is capitalized with 50% debt and 50% equity. The debt is in the form of debenture bonds, which have relatively weak indentures. The President and COO, who is also a major stockholder, has proposed issuing new secured bonds and using the cash raised to expand into a potentially profitable but very risky market outside the United States. The CEO has directed you to begin working on a plan to issue the bonds. Is there an ethical problem with the proposal? Why? Who is likely to gain at whose expense? (Hint: How are the ratings of the existing debenture bonds likely to change and how might this affect existing bondholders?)

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    The president is directing a very risky move. By capitalizing the company with more debt than it has equity to invest in risky business, the ratings of the existing bonds will likely fall as the company stands a good chance of not being able to make good on interest payments nor bond redemption. When the ratings fall, so does the value making ...

    Solution Summary

    Corporate ethics senario concerning risky investments and shifts in capital structure.