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?

Solutions

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 1 year ago

Next > < Previous

Related Solutions

Floral Corporation has a single class of common stock outstanding. Tammy owns 1,000 ?shares, which she...

Floral Corporation has a single class of common stock outstanding. Tammy owns 1,000 ?shares, which she purchased in 20112011 for $160,000. Floral declares a stock dividend payable in 8?% preferred stock having a $230 par value. Each shareholder receives oneone share of preferred stock for tenten shares of common stock. On the distribution date—December ?10, 2015—the common stock was worth $437 per? share, and the preferred stock was worth $230 per share. On April? 1, 2015?, Tammy sells halfhalf of...

Klon Corporation owns 70 percent of Brant Company’s stock and 60 percent of Torkel Company’s stock....

Klon Corporation owns 70 percent of Brant Company’s stock and 60 percent of Torkel Company’s stock. During 20X8, Klon sold inventory purchased in 20X7 for $66,000 to Brant for $110,000. Brant then sold the inventory at its cost of $110,000 to Torkel. Prior to December 31, 20X8, Torkel sold $50,000 of inventory to a nonaffiliate for $80,000 and held $60,000 in inventory at December 31, 20X8. a. Prepare the journal entries recorded by Klon, Brant, and Torkel during 20X8 relating...

a stock has had returns of 15 percent, 26 percent, -20 percent and 5 percent over...

a stock has had returns of 15 percent, 26 percent, -20 percent and 5 percent over the last 4 years. what is the holding period return for the stock?

Paton Corporation, a U.S. corporation, owns 100 percent of the stock of Tappan Ltd, a British...

Paton Corporation, a U.S. corporation, owns 100 percent of the stock of Tappan Ltd, a British corporation, and 100 percent of the stock of Monroe N.V., a Dutch corporation. Monroe has post-1986 undistributed earnings of €726 and post-1986 foreign income taxes of $484. Tappan has post-1986 undistributed earnings of £968 and post-1986 foreign income taxes of $242. During the current year, Tappan paid Paton a dividend of £520, and Monroe paid Paton a dividend of €520. The dividends were exempt...

4. Assume that a wealthy woman comes to you looking for some investment advice. She is...

4. Assume that a wealthy woman comes to you looking for some investment advice. She is in her early forties and has $250,000 to put into stocks. She wants to build up as much capital as she can over a 15-year period and is willing to tolerate a “fair amount” of risk. What types of stocks do you think would be most suitable for this investor? Come up with at least three types of stocks, and briefly explain the rationale...

Pole Corporation owns 65 percent of Stick Company's stock. At the end of 20X3, Pole and...

Pole Corporation owns 65 percent of Stick Company's stock. At the end of 20X3, Pole and Stick reported the following partial operating results and inventory balances: Pole Stick Total Sales $ 750,000 $ 200,000 Sales to Stick Company 150,000 Sales to Pole Corporation 75,000 Net income 35,000 Operating income (excluding investment income from Stick): 73,000 Inventory on hand, December 31, 20X3, purchased from: Stick Company 11,000 Pole Corporation 62,000 Pole regularly prices its products at cost plus a 40 percent...

Phone Corporation owns 80 percent of Smart Company's stock. At the end of 20X8, Phone and...

Phone Corporation owns 80 percent of Smart Company's stock. At the end of 20X8, Phone and Smart reported the following partial operating results and inventory balances: Phone Corporation Smart Company Total sales $ 679,000 $ 519,000 Sales to Smart Company 150,500 Sales to Phone Corporation 250,500 Net income 31,000 Operating income (excluding investment income from Smart) 81,000 Inventory on hand, December 31, 20X8, purchased from: Smart Company 50,100 Phone Corporation 45,150 Phone regularly prices its products at cost plus a...

You own a stock portfolio invested 20 percent in Stock Q, 20 percent in Stock R,...

You own a stock portfolio invested 20 percent in Stock Q, 20 percent in Stock R, 10 percent in Stock S, and 50 percent in Stock T. The betas for these four stocks are 1.12, 0.69, 1.16, and 1.69, respectively. What is the portfolio beta?

A stock has had returns of −30 percent, 20 percent, 34 percent, −20 percent, 37 percent,...

A stock has had returns of −30 percent, 20 percent, 34 percent, −20 percent, 37 percent, and 23 percent over the last six years. a.) What are the arithmetic average returns for the stock? b.) What are the geometric average returns for the stock? (4 Points)

Moss Corporation has a single class of common stock outstanding. Tanya owns 1,000 shares, which she...

Moss Corporation has a single class of common stock outstanding. Tanya owns 1,000 shares, which she purchased five years ago for $170,000. Moss declares a stock dividend payable in 8% preferred stock having a $230 par value. Each shareholder receives one share of preferred stock for ten shares of common stock. On the distribution date—December 16 of the current year—the common stock was worth $437 per share, and the preferred stock was worth $230 per share. On April 1 of...

Subjects