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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Stock Transactions and Ethics

Marilyn Cox is the office manager for DTR Inc. DTR constructs, owns, and manages apartment complexes. Marilyn has been involved in negotiations between DTR and prospective lenders as DTR attempts to raise $425 million to use to build apartments in a growing area of Tulsa. Based on her experience with past negotiations, Marilyn knows that lenders are concerned about DTR’s debt to equity ratio. When the negotiations began, DTR had debt of S80 million and equity of $50 million. Marilyn believes that DTR’s debt to equity ratio of l .6 is probably the minimum that lenders will accept.

Marilyn is also aware that DTR issued $10 million of common stock to a long-time friend of the corporation’s president in exchange for some land just before the negotiations with lenders began. The president’s friend constructs and sells single family homes. The land is in an area zoned only for single family housing and would be an attractive site for single family homes. Thus, the land is worth at least $10 million. However, DTR does not intend to build any single family homes.

Required:

2. If Marilyn believes that the $10 million stock issue was undertaken only to improve DTR’s debt to equity ratio and that it will be reversed whenever the president’s friend wants the land back or when DTR’s debt to equity position improves, what should she do?

To determine

Concept introduction:

Morals are judgments, standards, and rules of good conduct in the society. They guide people toward permissible behavior with regard to basic values. Business ethics are business policies and practices which are made to conduct a business in an ethical and moral way. Ethics can be found it laws but some are developed with the situations and moral and acceptable social behaviors.

Debt to Equity Ratio:

Debt to equity ratio is calculated to determine the leverage position of the company. It compares the total liabilities of the company with it total shareholders’ equity. The debt to equity ratio is calculated by dividing the Total Liabilities by Total Stockholder’s Equity. The formula to calculate Debt to equity ratio is as follows:

Debt to equity ratio = Total liabilitiesTotal Stockholder’s Equity

To indicate:

The action of the manager for change in the Debt to equity ratio.

Explanation

Morals are judgments, standards, and rules of good conduct in the society. They guide people toward permissible behavior with regard to basic values. Business ethics are business policies and practices which are made to conduct a business in an ethical and moral way...

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