rage ear : Ethics Case 1312 Debt for equity swaps; have your cake and eat it too LO145 L The cloudy afternoon mirrored the mood ofthe conference of division managers. Claude Meyer. assistant to the controller for Hunt Manufacturing. were one ofthe gloomy faces that were just emerging from the conference room. "Wow. I knew it was bad, but not that bad," Claude thought. "I don't look forward to sharing those numbers with shareholders." The numbers he discussed with himselfwere fourthquarter losses. which more than offset the prots ofthe rst 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 the damage. Later that night, he sat alone in his oice. scanning and rescanning the preliminary nancial statements on his computer monitor. Suddenly Claude's mood brightened. "This may work," he said aloud. though no one could hear. Fifteen minutes later. be congratulated himself. \"Yes?" The next day Claude eagerly explained his plan to Lisa Ahu. controller ofHunt for the last six years. The plan involved $300 million in convertible bonds issued three years earlier. - diet-er- 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 signicantly more than the utarket value of the stock we'd issue. I think we can produce a prot. - Aha: But Claude. our bondholders are not inclined to convert the bonds. - Mei-er.- 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 either. Required: Do you perceive an ethical dilemma? What would be the impact of following up on Claude's plan? Who would benet? Who would be injured