cloudy afternoon mirrored the mood of the conference of division
managers. Claude Meyer, assistant to the controller for Hunt
Manufacturing, wore one of the gloomy faces that were just emerging from
the conference room. “Wow, I knew it was bad, but not that bad,” Claude
thought to himself. “I don’t look forward to sharing those numbers with
The numbers he discussed with himself were
fourth quarter losses which more than offset the profits of the first
three quarters. Everyone had known for some time that poor sales
forecasts and production delays had wreaked havoc on the bottom line,
but most were caught off guard by the severity of damage.
that night he sat alone in his office, scanning and rescanning the
preliminary financial statements on his computer monitor. Suddenly his
mood brightened. “This may work,” he said aloud, though no one could
hear. Fifteen minutes later he congratulated himself, “Yes!”
next day he eagerly explained his plan to Susan Barr, controller of
Hunt for the last six years. The plan involved $300 million in
convertible bonds issued three years earlier.
Meyer: By swapping
stock for the bonds, we can eliminate a substantial liability from the
balance sheet, wipe out most of our interest expense, and reduce our
loss. In fact, the book value of the bonds is significantly more than
the market value of the stock we’d issue. I think we can produce a
Barr: But Claude, our bondholders are not inclined to convert the bonds.
Right. But, the bonds are callable. As of this year, we can call the
bonds at a call premium of 1%. Given the choice of accepting that
redemption price or converting to stock, they’ll all convert. We won’t
have to pay a cent. And, since no cash will be paid, we won’t pay taxes
Do you perceive an ethical dilemma? What
would be the impact of following up on Claude’s plan? Who would benefit?
Who would be injured?