Ethics in Action Edward Seymour is a financial consultant to Cornish Inc., a real estate syndicate. Cornish finances and develops commercial real estate (office buildings) projects. 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. Edward provides financial information for prospective investors in a document called the offering “prospectus.” This document discusses the financial and legal details of the limited partnership investment. One of the company’s current projects is called JEDI 2, and has the syndicate borrowing money from a local hank to build a commercial office building. The interest rate on the loan is 6.5% for the first four years. After four years, the interest rate jumps to 15% for the remaining 20 years of the loan. The interest expense is one of the major costs of this project and significantly affects the number of renters needed for the project to break even. In the prospectus, Edward has prominently reported that the break-even occupancy for the first four years is 65%. This is the amount of office space that must be leased to cover the interest and general upkeep costs during the first four years. The 65% break-even point is very low compared to similar projects and thus communicates a low risk to potential investors. Edward uses the 65% 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 jumps to 95% after the fourth year when the interest rate on the loan increases to 15%. Edward believes prospective investors are adequately informed of the investment’s risk. Is Edward behaving ethically? Explain your answer.

BuyFind

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207
BuyFind

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207

Solutions

Chapter
Section
Chapter 19, Problem 19.1TIF
Textbook Problem

Ethics in Action

Edward Seymour is a financial consultant to Cornish Inc., a real estate syndicate. Cornish finances and develops commercial real estate (office buildings) projects. 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. Edward provides financial information for prospective investors in a document called the offering “prospectus.” This document discusses the financial and legal details of the limited partnership investment.

One of the company’s current projects is called JEDI 2, and has the syndicate borrowing money from a local hank to build a commercial office building. The interest rate on the loan is 6.5% for the first four years. After four years, the interest rate jumps to 15% for the remaining 20 years of the loan. The interest expense is one of the major costs of this project and significantly affects the number of renters needed for the project to break even. In the prospectus, Edward has prominently reported that the break-even occupancy for the first four years is 65%. This is the amount of office space that must be leased to cover the interest and general upkeep costs during the first four years. The 65% break-even point is very low compared to similar projects and thus communicates a low risk to potential investors. Edward uses the 65% 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 jumps to 95% after the fourth year when the interest rate on the loan increases to 15%. Edward believes prospective investors are adequately informed of the investment’s risk.

Is Edward behaving ethically? Explain your answer.

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Chapter 19 Solutions

Financial & Managerial Accounting
Ch. 19 - High-low method The manufacturing costs of...Ch. 19 - Contribution margin Lanning Company sells 160,000...Ch. 19 - Break-even point Bigelow Inc. sells a product for...Ch. 19 - Target profit Ramirez Company sells a product for...Ch. 19 - Sales mix and break-even analysis Hughes Company...Ch. 19 - Operating leverage Tail Co. reports the following...Ch. 19 - Margin of safety Liu Company has sales of...Ch. 19 - Classify costs Following is a list of various...Ch. 19 - Identify cost graphs The following cost graphs...Ch. 19 - Identify activity bases For a major university,...Ch. 19 - Identify activity bases From the following list of...Ch. 19 - Identify fixed and variable costs Intuit Inc....Ch. 19 - Relevant range and fixed and variable costs Vogel...Ch. 19 - High-low method Ziegler Inc. has decided to use...Ch. 19 - High-low method for a service company Boston...Ch. 19 - Contribution margin ratio A. Young Company budgets...Ch. 19 - Contribution margin and contribution margin ratio...Ch. 19 - Break-even sales and sales to realize income from...Ch. 19 - Break-even sales Anheuser-Busch InBev Companies,...Ch. 19 - Break-even sales Currently, the unit selling price...Ch. 19 - Break-even analysis The Junior League of...Ch. 19 - Break-even analysis Media outlets such as ESPN and...Ch. 19 - Break even analysis for a service company Sprint...Ch. 19 - Cost-volume-profit chart For the coming year,...Ch. 19 - Profit-volume chart Using the data for Loudermilk...Ch. 19 - Break-even chart Name the following chart, and...Ch. 19 - Break-even chart Name the following chart, and...Ch. 19 - Sales mix and break-even sales Dragon Sports Inc....Ch. 19 - Break-even sales and sales mix for a service...Ch. 19 - Margin of safety A. If Canace Company, with a...Ch. 19 - Break-even and margin of safety relationships At a...Ch. 19 - Operating leverage Beck Inc. and Bryant Inc. have...Ch. 19 - Classify costs Seymour Clothing Co. manufactures a...Ch. 19 - Break-even sales under present and proposed...Ch. 19 - Break-even sales and cost-volume-profit chart For...Ch. 19 - Break-even sales and cost-volume-profit chart Last...Ch. 19 - Sales mix and break even sales Data related to the...Ch. 19 - Contribution margin, break even sales,...Ch. 19 - Classify costs Cromwell Furniture Company...Ch. 19 - Break-even sales under present and proposed...Ch. 19 - Break even sales and cost-volume-profit chart For...Ch. 19 - Break-even sales and cost-volume-profit chart Last...Ch. 19 - Sales mix and break even sales Data related to the...Ch. 19 - Contribution margin, break-even sales,...Ch. 19 - Break-even number of passengers for a cruise Ocean...Ch. 19 - Break-even subscribers for a video service Star...Ch. 19 - Break-even number of guests for a theme park...Ch. 19 - Ethics in Action Edward Seymour is a financial...Ch. 19 - Communication Sun Airlines is a commercial airline...

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