Question

For this week's Discussion, research one (1) publicly traded company in which you are interested using the Internet and/or Strayer databases. Locate the company website and financial statements. Also locate information on the types of bonds the company issues. Review the Liabilities section of the company’s Balance Sheet. Be prepared to discuss.

1. Imagine that you just read about another company in the same industry facing criminal charges for misrepresenting their liabilities. Naturally, you’re worried that the company you’re researching might be doing something similar. Hypothesize a scenario in which someone at the company could intentionally misstate liabilities for his or her personal financial gain. Recommend two (2) actions that these companies can take to prevent or detect intentional misstatements of liabilities for personal financial gain. Justify your response.

2. Imagine that you are advising an investor who is considering purchasing bonds issued by the selected company. Analyze the types of bonds the chosen company issues. Make a recommendation to the investor as to which type of bond would provide the most value. Justify your response.

Answer 1

1. Companies should have well defined job responsibilities in place with proper monitoring and control systems. Thus each employee will have well defined job profile with constant performance management and a team leader or manager who would be responsible for the diligent execution of his team's job responsibility. In this top down job role approach accountability and ownership are very crucial and thus employee will be encouraged to act in the best interest of the company rather than achieve personal financial gains.

E.g Increased fake expenditure bills are best way to misrepresent liabilities and thus divert those amounts for personal gains. Thus in operations each production team is under a manager who is constantly monitoring the expenditures are actually incurre on real time basis. That manager is inturn responsibly monitored by his senior who ensures that all proper practices are in order.

Another effective measure of controlling such misrepresentations is continuous audit for each department of the company whether operations or finance. Thus the internal auditors will act as another channel of control whose reporting will directly result in firing by the company. Auditors are malicious people who are always feared by staff and are dear to management. These people have a set of matrices which are constantly being updated, to study and examine the processes and find out if any misrtepresentation of liabilities is being done for personal favours by employees or managers or even executives.

2. The company is abig corporation which can issue mostly the following type os bonds:-

Investment-grade corporate bonds: Investment-grade corporates are issued by companies with relatively strong balance sheets. They carry ratings of at least triple-B from Standard & Poor's, Moody's Investors Service or both rating agencies. The risk of default is considered pretty less. Their yields are higher than either Treasury or government bonds, but they are fully taxable.

High-yield bonds: These bonds are issued by companies or financing vehicles with relatively weak balance sheets. They carry ratings below triple-B. Default is a distinct possibility.

Foreign bonds: These securities are something else altogether. Some are dollar-denominated, but the average foreign bond fund has about a third of its assets in foreign-currency-denominated debt. With foreign-currency-denominated bonds, the issuer promises to make fixed interest payments -- and to return the principal -- in another currency. The size of those payments when they are converted into dollars depends on exchange rates. If the dollar strengthens against foreign currencies, foreign interest payments convert into smaller and smaller dollar amounts (if the dollar weakens, the opposite holds true). Exchange rates, more than interest rates, can determine how a foreign bond fund performs.

Based on the aforesaid I would recommend Investment Grade Corporate Bond to the investor as these are safe haven and still give decent return. It is the taste of safe equities.