Question

Kat Keiser is the president and principal stockholder of Kat's Kupcakery, Inc. The business is applying for a $100,000 bank loan for expansion. Keiser believes she is more likely to get approved for the loan if the business's balance sheet looks good. She is considering the following options for improving the owner's equity of the business in order to obtain the loan:

1. Issue $50,000 of common stock in exchange for cash to a friend who is interested in investing in the company. This would increase assets (cash) by $50,000 and increase owner's equity by $50,000.

OR

2. Transfer $50,000 of Keiser's personal land to the business and issue common stock to herself. After the loan is obtained, Keiser will transfer the land back to herself and zero out the common stock. This would temporarily increase assets (land) by $50,000 and increase owner's equity by $50,000.

Discuss the ethical issue in this case. Analyze the alternatives from an ethical and a business point of view. Who are the stakeholders? What are the consequences? What would you do?

Answer 1

Answer)

Here, the second option is the most unethical practice as transferring the land to business in exchange of shares temporarily and then transferring back without transferring back the shares will be an offence as in suck case there will be a massive $50000 loss and hence,it cannot be considered.Here,it would be ethical that if she don't transfer the land back to her personal property but it is necessary for her to communicate it with other shareholders as it would dilute their power.

Here,while considering the first option,Kat Kaiser must take the opinion of other stake holders also as they are also investors in the company and issuing shares worth $50000 will dilute their power.

Here, after recieving the approval she can issue the shares either for her friend for cash or to her account for land(provided the land must not be transfered back without adequate consideration) or to the general public for cash or to the existing shareholders in their current holding ratio to avoid dilution of power.