Question

Donald Lennon is the president, founder, and majority owner of Wichita Medical Corporation, an emerging medical technology products company. Wichita is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Donald, as owner of 51% of the outstanding stock, manages the company’s operations. He places heavy emphasis on research and development and long-term growth. The other principal stockholder is Nina Friendly who, as a nonemployee investor, owns 40% of the stock. Nina would like to deemphasize the R & D functions and emphasize the marketing function to maximize short-run sales and profits from existing products. She believes this strategy would raise the market price of Wichita’s stock.

All of Donald’s personal capital and borrowing power is tied up in his 51% stock ownership. He knows that any offering of additional shares of stock will dilute his controlling interest because he won’t be able to participate in such an issuance. But, Nina has money and would likely buy enough shares to gain control of Wichita. She then would dictate the company’s future direction, even if it meant replacing Donald as president and CEO.

The company already has considerable debt. Raising additional debt will be costly, will adversely affect Wichita’s credit rating, and will increase the company’s reported losses due to the growth in interest expense. Nina and the other minority stockholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of “his” company, Donald is doing everything to avoid a stock issuance and is contemplating a large issuance of bonds, even if it means the bonds are issued with a high effective-interest rate.

Instructions

(a) Who are the stakeholders in this situation?

(b) What are the ethical issues in this case?

(c) What would you do if you were Donald?

Short answer

a) There are various stakeholders, some of whom are future bondholders. Donald Lennon, chairman, founder, and majority shareholder.

b) The company plans to issue additional debt despite rising debt's effects on the company's finances and performance.

c) Analyze the impact of raising additional debt to provide capital for additional investment.

Step-by-step solution

Meaning of Research and Development (R & D)

R&D is theprocess through which a corporation seeks out fresh information that it can use to produce goods, services, or some new systems that it can use or sell.

(a) Naming the stakeholders

Stakeholders in the Wichita case include:

• Donald Lennon, president, founder, and majority stockholder.
• Nina Friendly, minority stockholder.
• Other minority stockholders.
• Existing creditors (debt holders).
• Future bondholders.
• Employees, suppliers, and customers

(b) The ethical issue in the case

The ethical issue in this situation is that Donald, the company's president, and CEO, who also holds the majority of the company's shares, intends to issue more debt despite the negative impact of increased debt on the company's finances and performance. To keep a controlling position, Donald also rejects the idea of issuing more stock.

(c) Interpreting the decision as oneself

Put aside my interests and consider the implications of taking on more debt to finance new investments. Donald would issue the bond if the outcome did not put the company at risk. If the rising debt threatened the company’s future performance, Donald would issue shares, even if doing so would reduce his control.