CAPITAL STOCK TRANSACTIONS AND ETHICS. Charlene Jones is the office manager for MK Corporation. MK constructs, owns, and manages apartment complexes. Charlene has been involved in negotiations between MK and prospective lenders as MK attempts to raise $425 million that it plans to use to build apartments in

‘ a growing area of Kansas City. Based on her experience with past negotiations Charlene knows that lenders are concerned about MK’s debt to equity ratio. When the negotiations began, MK had debt of $80 million and equity of $50 million. Charlene believes that MK’s debt to equity ratio of 1.6 is probably the minimum that lenders will accept.

Charlene is also aware that MK corporation issued $10 million of common stock to a longtime friend of the corporation’s president in exchange for some land just before the negotiations with lenders began. The president’s friend constructs and sells singlefamily homes. The land is in an area zoned only for single-family housing and would be an attractive site for single-family homes. Thus, the land is worth at least $10 million. However, MK does not intend to build any single-family homes.

REQUIRED:

1. What would have been MK’s debt to equity ratio if the $10 million of stock had not been issued for the land?

2. If Charlene believes that the $10 million stock issue was undertaken only to improve MK’s debt to equity ratio and that it will be reversed whenever the president’s friend wants the land back or when MK’s debt to equity position improves, what should she do?