Tammy is wealthy and owns 20 percent of TDS Corporation stock. She was looking over the...

Tammy is wealthy and owns 20 percent of TDS Corporation stock. She was looking over the corporation’s financial statements and saw that TDS Corporation was in need of a large loan. Furthermore, she knew that December sales were weaker than expected and that the yearly finan-cial statements would show a lower net income than anticipated. She decided to lend the company $2 million at 6 percent interest and become a customer and purchase $280,000 of merchandise. By Tammy becoming a customer, it would increase the business’s December sales and net income and give the company sufficient cash to meet expenses.

When approached with Tammy’s ideas, the CEO objected, stating that the “loan” would have to be recorded as additional paid-in capital because a stockholder could not lend money to a company. Tammy stated that as long as the money was treated as a loan with interest and with the expectation of repayment, it should be allowed. The CEO then stated that it would be unethi-cal for the company to “borrow” money from a stockholder. Also, it would be unethical for the company to “sell” merchandise to a stockholder because it would be done merely to improve the December sales. Tammy suggested that the loan agreement and 6 percent interest would make the arrangement reasonable. She stated that if the interest rate was 25 percent, then the CEO might have a valid ethical concern. Tammy also argued that the sale of merchandise to her was completely ethical because she was not going to return it. She further contended that it should not matter whether she was a stockholder because, in these transactions, she would be a lender and a customer, which would not involve any ethical issues.

Can a stockholder lend money to a corporation? What potential ethical issues would be involved? Can a stockholder become a customer and make purchases just to improve sales and net income? Does the amount of the purchase matter? Why do you think the CEO was concerned?

Expert Solution

Definition of Stakeholder

Who can affect or be affected by the organization's actions, objectives and policies of the organization is called Stakeholder. Some examples of key stakeholders are customers, directors, employees, government (and its agencies), owners (shareholders), suppliers, unions, and the community from which the business draws its resources.

Corporate can borrow money from the stakeholder and repay the loan with agreed rate of interest by the board of directors and companies Act.

Ethics refers to the moral rights and wrongs of any decision a business makes. It is a value judgment that may differ in importance and meaning between different individuals. Businesses may adopt ethical policies because they believe in them or they believe that by showing they are ethical, they improve their sales.

From the definition, Stakeholder can be a Customer of the corporation. Hence stakeholder can make purchases to improve sales and net income of the corporation. But there should be agreement with the corporation and stakeholder on purchase price of the product. Which should not adversely impact on the financial position of the Corporation and price agreed by the Board of the Directors of the company as well?

As per the CEO concerned, there will be possibility of favored price with discount to the stakeholder, it will adversely impact the financial position of the company and more dependence on one person, which will not good to the corporation and there will be possibility of influence the decisions of the corporation.

ekkarill92 answered 2 years ago

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