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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Ethics in Action

CEG Capital Inc. is a large holding company that uses long-term debt extensively fund its operations. At December 31, the company reported total assets of $100 million, total debt of $55 million, and total equity of $45 million. In January, the company issued$ 11 billion in long-term bonds to investors at par value. "This was the largest debt issued in the company's history, and it .significantly increased the company's ratio of total debt to total equity. Five days after the debt issuance, CEG filed legal documents to prepare for an additional $50 billion long-term bond issue. As a result of this filing, the price of the $ 11 billion in bonds that the company issued earlier in the week dropped to 94 because of the increased risk associated with the Company's debt. The investors in the original $11 billion bond issuance were not informed of the company's plans to issue additional debt so quickly after the initial bond issue.

Did CEG Capital act unethically by not disclosing to initial bond investors its immediate plans to issue an additional $50 billion debt offering?

To determine

Long-term debt: This is a financial or lease obligation, owed by a company, which have a maturity of more than 12-month period.

To discuss: The ethical issues related to the issue of long-term bonds, without disclosing the plans of additional issue of long-term bonds

Explanation

The management of Incorporation CEG neither did behave unethically nor violate the laws, because the issue of additional long-term debt is done technically as per the law. But such actions might attract investors’ criticism...

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