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Assume you are the CFO of a struggling company. While you do have a positive cash flow, it is minimal at best. If something does not change soon, the company will go under. Fortunately, your product development team has just created a new product that will not only save the company from financial demise, but the product will revolutionize how the industry does business. The problem is that the product is still two years away before it can be sold to the public, and you will run out of cash within the next six months. How would you propose obtaining the funds needed to keep the company alive and thriving for the next two years until you are able to see a return on the product development, and keep the stakeholders happy?

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Nestor Rutherford
Nestor RutherfordLv2
28 Sep 2019
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Week 1 Discussion -- Ethical Dilemma

What They Don’t Know Won’t Hurt Them!

Revolutionary Electronic Technologies (RET) recently released anew advanced electronic micro system to be used by financialinstitutions, large corporations, and governments to process andstore financial data, such as taxes and automatic payroll payments.Even though RET developed the technology used in the creation ofthe product, RET’s competitors are expected to possess similartechnology soon. To beat the competition to the market, RETintroduced its new micro system a little earlier than originallyplanned. In fact, laboratory testing had not been fully completedbefore the product reached the market. The tests are complete now,and the final results suggest the micro system might be flawed withrespect to how some data are retrieved and processed. The tests arenot conclusive, though, and even if additional testing proves thata flaw does exist, according to RET, it is of minuscule importancebecause the problem seems to occur for only one out of 100 millionretrieval and processing attempts. The financial ramificationsassociated with the flaw are unknown at this time.

Assume that you are one of RET’s senior executives whose annualsalary is based on the performance of the firm’s common stock. Yourealize that if RET recalls the affected micro system, the stockprice will suffer; thus, your salary for the year will be less thanyou expected. To complicate matters, you just purchased anexpensive house based on your salary expectations for the next fewyears—expectations that will not be realized unless the newmicrosystem is a success for RET.

As one of the senior executives, you will help determinewhat course of action RET will follow with respect to the microsystem. What should you do? Should you encourage RET to recall themicro system until further testing is completed? What other coursesof action do you suggest?

Below is the answer to one of my classmate. I need toresponses something.

Quality of responses to at least two classmates. Saysomething deep & intuitive, don't just rephrase something youread or another student's posting.

Ethics is expressed through a set of rules that have become moreor less explicit following a set of values displayed by thecompany. And then there is the behavioral ethics, specific to theindividual, which is governed by his values, his beliefs, hisconvictions, and who must conform to the professional practicesexpected in his professional environment. Every day, we questionourselves consciously or not about our behaviors but we are alsoconfronted with situations that do not seem to us necessarilyethical ... The human slips so easily under the pressure and theunconscious fears.

As an executive at RET, the ethical thing to do would be toenforce the recall because it will not only keep our integrity tothe eye of the public but also add to our credibility. Money isalways tempting but being a professional requires to make the rightdecision at the right moment. A mistake was made at the beginningbut we need to save the face of the company. It may seem like aloss now but in the long run it will benefit us. As an executive ialways have to prioritize the customer, therefor not selling them afaulty product. In conclusion, personal gratification does notsurpass the company's long term objectives.

A company is considering two different solutions to an issue it is experiencing with its product line’s obsolete manufacturing equipment. The equipment has historically refined its V1 components, adding additional features that convert the V1 into the V2, a higher margin component. However, the processing generally destroys about 15% of the V1 components (discovered during quality inspection just before packing) and, because of the manufacturing equipment’s age and frequent malfunction, that percentage is beginning to rise.

the company is considering the following two solutions and must select one of these paths forward:

Solution A: Invest in a new piece of equipment that will convert the V1 into the V2 at not only a faster pace (25/hour versus the old machine that converted at the rate of 20/hour), but also would decrease the defects from 15% to 10%. Part of the appeal of this solution is that the company believes it can increase sales in the next fiscal year by entering into a new geographic market if only its capacity could handle it. Right now, they are selling all V2s produced, and could sell all V2s produced with the new machine.. The cost of the new machine is $1,100,000 and they would need to spend $55,000 at the end of each year in maintenance to keep it in pristine condition over its 7-year useful life. At the end of 7-years, the company expects zero salvage value on the equipment. the company’s cost of capital is 10%.

Solution B: The company has a strong market for its V1 product. It can elect to not replace the manufacturing equipment that converts the V1 to the V2 and then sell all of its V1 product to a handful of key customers. The V1 manufacturing equipment is fairly new, requiring only $5,000 in maintenance each year. Current yields are 35 V1s/hour.

the company runs two 8-hour shifts that each operate five days a week, 52 weeks/year. The unit costs for the two products are as follows:

Revenue Direct Material Direct Labor

V1008 $50 $14 $11

V2008* $72 $8 $4

*Incremental DM and DL added to convert V1 to V2.

Using the above information, answer the following two questions. For the purpose of this analysis, ignore taxes.

1) Using the “Incremental Cost Approach” in your analysis, which solution should Foreman select? Show your calculations. Keep in mind the concept of relevant costs. You may attach an Excel spreadsheet with your numeric analysis if you wish.

2) Foreman’s VP of Sales has expressed concern about losing long-term customers should they discontinue the V2 line. Others have brought up issues that Foreman’s management team had not considered. Regardless of your answer to number 1 above, assume that the analysis does NOT point to elimination of the V2 line. How sensitive do you think your analysis could be to the following risks (explain how this risk could impact your decision):

A) Foreman’s cost of funds after year one escalates to 13% driven by a tightening of the credit market.

B) The “new market” for V2 is projected to be significantly higher than Foreman’s capacity.

C) Foreman’s CEO is compensated based on total revenue.

Over the past few years, the number of start-up companies attracted to either doing business themselves in the cloud, or specifically creating applications for others to use in the cloud, has grown significantly. A few but very promising enterprises have launched applications in “container” technology, which enables companies, programmers, or other enterprises to both launch and run applications solely in the cloud. There is still a lot of room in this emerging marketplace, and you are diving in. The product you’ve developed has a unique angle to tap into the local-grown/local-made/local-paid movement that’s also growing larger every day. Your initial market is your own small city, which operates independently but which is linked economically and via public safety provision to another small city sitting directly across a river separating the two. Once you’ve been able to launch your company in your city, you plan to approach the “sister city” leaders, then the county, state, and eventually go national. It’s too soon now, but your future plans entail an IPO offering to accomplish all this. Eventually, you hope to be able to re-imagine your product to go global. You have big plans, are close to being tapped out financially and you now need to plan for additional investors. Address the following considerations as they apply to your product launch. Describe an agency relationship and how it may/will take shape for your small company. As the sole employee and investor in your startup, what agency conflicts might arise? Six months have transpired, and you’ve been able to add two employees. In this new arrangement, what agency disputes might now develop that need to be addressed, and how might you address them? What resources do you need to use or consider? Another three months have passed. You are now ready to expand to your sister city and you need more capital. You decide the wisest path is to sell some stock to outside investors, but you will maintain control over your company by holding onto the majority of the stock. In this new scenario, what type of agency conflict might occur? How can you address this in advance? The IPO was a success, and you have a robust number of shareholders. With board support, you determine it is time to hire a financial manager to help your firm achieve current goals and set new ones appropriate to the firm’s growth strategy. What professional strengths and skills will an individual seeking this position need to possess? Another consideration you feel you need to address at this point, now that your firm’s stock is publicly traded, is how to sustain the high ethical standards you’ve fostered thus far as you move into the firm’s future. What strategies can your management team implement to conduct your business with both personal and professional integrity? What steps can you take to ensure that ethical considerations for financial and other management decisions are embedded into the firm’s culture? Congratulations - you are now at Year One, and everything is moving along faster than you anticipated. While this is great, you are at the point where you need to raise additional capital from outside lenders. With this decision, what type of agency costs might the company incur? How might a lender mitigate any agency costs? Year Two rolls around. Your company has been able to expand beyond your local communities and into to localities and governments in half the counties of the state. The stakes are getting bigger and you welcome the idea of high-level input to ensure the company keeps growing and expanding. You cash out the majority of your stock and turn the company over to an elected board of directors. Neither you nor any other stockholders own a controlling interest (which is also the situation at most public companies). List six potential managerial behaviors the new board might take that could harm your company’s value, and what steps overall can put into place to avoid or mitigate these.

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