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Ethics in Action Tommy Gunn is a division manager for K-Cern Inc., a small pharmaceutical company. Tommy’s division has been working on a new drug that has the potential to revolutionize the treatment of skin cancer. Once the drug is proven to be effective in clinical trials, it will be approved for sale by the government and patented by the company. Because of the potential market for this drug, it is highly likely that the company’s revenues and net income will increase significantly when it is approved. Tommy recently saw an internal company memo indicating that the drug passed its final clinical trial and that the company has received government approval to sell the drug. The company will issue a press release announcing this news in the next two days, and this announcement is expected to result in a dramatic increase in the company’s stock price. Tommy knows that there is “free money” to be made if he invests in the stock before the announcement is made. However, K-Cern has a strict policy against employee purchases of company stock outside of established employee stock purchase plans. To get around this rule, Tommy asks his father to purchase the stock for him. The next morning Tommy’s father purchases the stock with the understanding that he will split the profits with Tommy. Is Tommy behaving ethically? Why or why not?

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 13, Problem 1CP
Textbook Problem
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Ethics in Action

Tommy Gunn is a division manager for K-Cern Inc., a small pharmaceutical company. Tommy’s division has been working on a new drug that has the potential to revolutionize the treatment of skin cancer. Once the drug is proven to be effective in clinical trials, it will be approved for sale by the government and patented by the company. Because of the potential market for this drug, it is highly likely that the company’s revenues and net income will increase significantly when it is approved. Tommy recently saw an internal company memo indicating that the drug passed its final clinical trial and that the company has received government approval to sell the drug. The company will issue a press release announcing this news in the next two days, and this announcement is expected to result in a dramatic increase in the company’s stock price. Tommy knows that there is “free money” to be made if he invests in the stock before the announcement is made. However, K-Cern has a strict policy against employee purchases of company stock outside of established employee stock purchase plans. To get around this rule, Tommy asks his father to purchase the stock for him. The next morning Tommy’s father purchases the stock with the understanding that he will split the profits with Tommy.

Chapter 13, Problem 1CP, Ethics in Action Tommy Gunn is a division manager for K-Cern Inc., a small pharmaceutical company. Is Tommy behaving ethically? Why or why not?

To determine

Describe and justify whether Person T is behaving ethically.

Explanation of Solution

Yes, Person T is behaving in an unethical manner.

Person T’s behavior seems to be unethical for the following reasons:

  • Person T violates the company policy on stock purchases, since company has strict policy to make sure the fair and timely dissemination of the information, so that all investors have the chance to take up or sale the stock at the time of stock price fluctuation.
  • Person T is an insider, and he is the authorized person to disseminate the information...

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Chapter 13 Solutions

Financial Accounting
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