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Ethics and professional conduct in business Phil Fritz is a financial consultant to Magna Properties Inc., a real estate syndicate. Magna Properties Inc. finances and develops commercial real estate (office buildings). The completed projects are then sold as limited partnership interests to individual investors. The syndicate makes a profit on the sale of these partnership interests. Phil provides financial information for the offering prospectus, which is a document that provides the financial and legal details of the limited partnership offerings. In one of the projects, the hank has financed the construction of a commercial office building at a rate of 7% for the first four years, after which time the rate jumps to 9% for the remaining 21 years of the mortgage. The interest costs are one of the major ongoing costs of a real estate project. Phil has reported prominently in the prospectus that the break-even occupancy for the first four years is 48%. This is the amount of office space that must be leased to cover the interest and general upkeep costs over the first four years. The 48% break-even is very low and thus communicates a low risk to potential investors. Phil uses the 48% break-even rate as a major marketing tool in selling the limited partnership interests. Buried in the fine print of the prospectus is additional information that would allow an astute investor to determine that the break-even occupancy will jump to 92% after the fourth year because of the contracted increase in the mortgage interest rate. Phil believes prospective investors are adequately informed as to the risk of the investment. Comment on the ethical considerations of this situation.

BuyFind

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883
BuyFind

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883

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Chapter
Section
Chapter 11, Problem 11.1C
Textbook Problem

Ethics and professional conduct in business
Phil Fritz is a financial consultant to Magna Properties Inc., a real estate syndicate. Magna Properties Inc. finances and develops commercial real estate (office buildings). The completed projects are then sold as limited partnership interests to individual investors. The syndicate makes a profit on the sale of these partnership interests. Phil provides financial information for the offering prospectus, which is a document that provides the financial and legal details of the limited partnership offerings. In one of the projects, the hank has financed the construction of a commercial office building at a rate of 7% for the first four years, after which time the rate jumps to 9% for the remaining 21 years of the mortgage. The interest costs are one of the major ongoing costs of a real estate project. Phil has reported prominently in the prospectus that the break-even occupancy for the first four years is 48%. This is the amount of office space that must be leased to cover the interest and general upkeep costs over the first four years. The 48% break-even is very low and thus communicates a low risk to potential investors. Phil uses the 48% break-even rate as a major marketing tool in selling the limited partnership interests. Buried in the fine print of the prospectus is additional information that would allow an astute investor to determine that the break-even occupancy will jump to 92% after the fourth year because of the contracted increase in the mortgage interest rate. Phil believes prospective investors are adequately informed as to the risk of the investment.
Comment on the ethical considerations of this situation.

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Chapter 11 Solutions

Survey of Accounting (Accounting I)
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Ch. 11 - Which of the following graphs illustrates how...Ch. 11 - Which of the following graphs illustrates how unit...Ch. 11 - Which of the following graphs best illustrates...Ch. 11 - In applying the high-low method of Cost...Ch. 11 - If fixed costs increase, what would be the impact...Ch. 11 - An examination of the accounting records of...Ch. 11 - If the unit cost of direct materials is decreased,...Ch. 11 - If insurance rates are increased, what effect will...Ch. 11 - Both Gouda Company and Cheddar Company had the...Ch. 11 - The reliability of cost-volume-profit (CVP)...Ch. 11 - How does the sales mix affect the calculation of...Ch. 11 - What does operating leverage measure, and how is...Ch. 11 - Classify costs Following is a list of various...Ch. 11 - Identify cost graphs The following cost graphs...Ch. 11 - Identify activity bases For a major university,...Ch. 11 - Identify activity bases From the following list of...Ch. 11 - Identify fixed and variable costs Intuit Inc....Ch. 11 - Relevant range and fixed and variable costs Third...Ch. 11 - High-low method Liberty Inc. has decided to use...Ch. 11 - High-low method for service company Miss River...Ch. 11 - Contribution margin ratio a. Matzinger Company...Ch. 11 - Contribution margin and contribution margin ratio...Ch. 11 - Break-even sales and sales to realize operating...Ch. 11 - Break-even sales Molson-Coors Brewing Company...Ch. 11 - Break-even sales Currently, the unit selling price...Ch. 11 - Break-even analysis The Garden Club of Palm...Ch. 11 - Break-even analysis Media outlets such as ESPN and...Ch. 11 - Cost-volume-profit graph For the coming year....Ch. 11 - Profit-volume graph Using the data for Cabinet...Ch. 11 - Break-even graph Name the following graph, and...Ch. 11 - Break-even graph Name the following graph and...Ch. 11 - Sales mix and break-even sales Northwest...Ch. 11 - Break-even sales and sales mix for a service...Ch. 11 - Operating leverage SunRise Inc. and SunSet Inc....Ch. 11 - Classify costs Peak Apparel Co. manufactures a...Ch. 11 - Break-even sales under present and proposed...Ch. 11 - Break-even sales under present and proposed...Ch. 11 - Break-even sales under present and proposed...Ch. 11 - Break-even sales under present and proposed...Ch. 11 - Break-even sales under present and proposed...Ch. 11 - Break-even sales under present and proposed...Ch. 11 - Break-even sales under present and proposed...Ch. 11 - Break-even sales under present and proposed...Ch. 11 - Break-even sales and cost-volume-profit graph For...Ch. 11 - Break-even sales and cost-volume-profit graph For...Ch. 11 - Break-even sales and cost-volume-profit graph For...Ch. 11 - Break-even sales and cost-volume-profit graph For...Ch. 11 - Break-even sales and cost-volume-profit graph Last...Ch. 11 - Break-even sales and cost-volume-profit graph Last...Ch. 11 - Break-even sales and cost-volume-profit graph Last...Ch. 11 - Break-even sales and cost-volume-profit graph Last...Ch. 11 - Sales mix and break-even sales Data related to the...Ch. 11 - Sales mix and break-even sales Data related to the...Ch. 11 - Sales mix and break-even sales Data related to the...Ch. 11 - Sales mix and break-even sales Data related to the...Ch. 11 - Sales mix and break-even sales Data related to the...Ch. 11 - Contribution margin, break-even sales,...Ch. 11 - Contribution margin, break-even sales,...Ch. 11 - Contribution margin, break-even sales,...Ch. 11 - Contribution margin, break-even sales,...Ch. 11 - Contribution margin, break-even sales,...Ch. 11 - Margin of safety a. If Go-Go Buggies Company, with...Ch. 11 - Break-even and margin of safety relationships At a...Ch. 11 - Margin of safety Use the data from E11-12 and...Ch. 11 - Margin of safety Use the data from E11-12 and...Ch. 11 - Sales mix and margin of safety Use the data from...Ch. 11 - Sales mix and margin of safety Use the data from...Ch. 11 - Sales mix and margin of safety Use the data from...Ch. 11 - Margin of safety Using the data from P11-2,...Ch. 11 - Margin of safety Using the data from Pll-2,...Ch. 11 - Margin of safety Using the data from P11-6....Ch. 11 - Margin of safety Using the data from P11-6....Ch. 11 - Margin of safety Using the data from P11-6....Ch. 11 - Ethics and professional conduct in business Phil...Ch. 11 - Break-even sales, contribution margin "Every...Ch. 11 - Break-even analysis Aquarius Games Inc. has...Ch. 11 - Variable costs and activity bases in decision...Ch. 11 - Variable costs and activity bases in decision...Ch. 11 - Break-even analysis Break-even analysis is one of...

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