Discussion 3

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Houston Baptist University *

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6380

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Finance

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Apr 30, 2024

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FINA 3320 Discussion 3 Case 5: Chances Are, What They Don’t Know Won’t Hurt Them! Futuristic Electronic Technologies (FET) recently released a new advanced electronic micro- system to be used by financial institutions, large corporations, and governments to process and store financial data such as taxes and automatic payroll payments. Even though FET developed the technology used in the creation of the product, FET’s competitors are expected to possess similar technology soon. To be at the competition to the market, FET introduced its new micro system a little earlier than originally planned. In fact, laboratory testing had not been fully completed before the product reached the market. The tests are complete now, and the final results suggest the microsystem might be flawed with respect to how some data are retrieved and processed. The tests are not conclusive, however. Even if additional testing proves that a flaw does exist, FET managers believe it is of minuscule importance because the problem seems to occur for only one out of 100 million retrieval and processing attempts. The financial ramifications associated with the flaw are unknown at this time. Assume you are one of FET’s senior executives whose annual salary is based on the performance of the firm’s common stock. You realize that if FET recalls the affected microsystem, the stock price will suffer; thus, your salary for the year will be less than you expected. To complicate matters, you just purchased an expensive house based on your salary expectations for the next few years—expectations that will not be realized unless the new microsystem is a success for FET. As one of the senior executives, you will help determine what course of action FET will follow with respect to the microsystem. Ethical questions: What is the ethical issue? Where is the harm, if any? Is the harm justifiable? If there is a conflict between moral and legal principles, what is the best solution for such a conflict? Should you encourage FET to recall the microsystem until further testing is completed? Or can you suggest another course of action?

Case 6: Hocus-Pocus—Look, An Increase in Sales! Dynamic Energy Wares (DEW) manufactures and distributes products that are used to save energy and to help reduce and reverse the harmful environmental effects of atmospheric pollutants. DEW relies on a relatively complex distribution system to get the products to its customers. Large companies, which account for nearly 30 percent of the firm’s total sales, purchase directly from DEW. Smaller companies and retailers that sell to individuals are required to make their purchases from one of the 50 independent distributors that are contractually obligated to exclusively sell DEW’s products. DEW’s accountants have just finished the firm’s financial statements for the third quarter of the fiscal year, which ended three weeks ago. The results are terrible. Profits are down 30 percent from this time last year, when a downturn in sales began. Profits are depressed primarily because DEW continues to lose market share to a competitor that entered the field nearly two years ago. Senior management has decided that it needs to take action to boost sales in the fourth quarter so that year- end profits will be “more acceptable.” Starting immediately, DEW will (1) eliminate all direct sales, which means that large companies must purchase products from DEW’s distributors just as the smaller companies and retailers do, (2) require distributors to maintain certain minimum inventory levels, which are much higher than previous levels, and (3) form a task force to study and propose ways that the firm can recapture its lost market share. The financial manager, who is your boss, has asked you to attend a hastily called meeting of DEW’s distributors to announce the implementation of these operational changes. At the meeting, the distributors will be informed that they must increase inventory to the required minimum level before the end of DEW’s current fiscal year or face losing the distributorship. According to your boss, the reason for this requirement is to ensure that distributors can meet the increased demand they will face when the large companies are no longer permitted to purchase directly from DEW. The sales forecast you have been developing over the past few months, however, indicates that distributors’ sales are expected to decline by almost 10 percent during the next year. As a consequence, the added inventories might be extremely burdensome to the distributors. When you approached your boss to discuss this potential problem, she said, “Tell the distributors not to worry! We won’t require payment for six months, and any additional inventory that remains unsold after nine months can be returned. But they must take delivery of the inventory within the next two months.” It appears that the actions implemented by DEW will produce favorable year-end sales results for the current fiscal year. Do you agree with the decisions made by DEW’s senior management? Will you be comfortable announcing the changes to DEW’s distributors? How would you respond to a distributor who says the following: “DEW doesn’t care about us. The company just wants to look good, no matter who gets hurt. That’s unethical.” Ethical questions: What is the ethical issue? Where is the harm, if any? Is the harm justifiable? If there is a conflict between moral and legal principles, what is the best solution for such a conflict? What will you say to your boss? Will you attend the distributors’ meeting?

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