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CEG Capital Inc. is a large holding company that uses long-term debt extensively to 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 issuance 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?

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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 14, Problem 1CP
Textbook Problem
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CEG Capital Inc. is a large holding company that uses long-term debt extensively to 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 issuance 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.

Chapter 14, Problem 1CP, CEG Capital Inc. is a large holding company that uses long-term debt extensively to fund its 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

Discuss the ethical issues related to the issue of long-term bonds, without disclosing the plans of additional issue of long-term bonds

Explanation of Solution

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

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...

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Chapter 14 Solutions

Financial Accounting
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