TIF 5-1 Ethics in Action Edward Seymour is a financial consultant to Cornish Inc., a real estate syndicate. Cornish fi- nances and develops commercial real estate (office buildings) projects. The completed projects are then sold as limited partnership interests to individual investors. The syndicate makes a profit on the sale of these partnership interests. Edward provides financial information for prospective investors in a document called the offering "prospectus." This document discusses the financial and legal details of the limited partnership investment. One of the company's current projects is called JEDI 2, and has the syndicate borrowing money from a local bank to build a commercial office building. The interest rate on the loan is 6.5% for the first four years. After four years, the interest rate jumps to 15% for the remaining 20 years of the loan. The interest expense is one of the major costs of this project and significantly affects the number of renters needed for the project to break even. In the prospectus, Edward has prominently reported that the break-even occupancy for the first four years is 65%. This is the amount of office space that must be leased to cover the interest and general upkeep costs during the first four years. The 65% break-even point is very low compared to similar projects and thus communicates a low risk to potential investors. Edward uses the 65% break-even rate as a major marketing tool in selling the limited partnership interests. Buried in the fine print of the prospec- tus is additional information that would allow an astute investor to determine that the break-even occupancy jumps to 95% after the fourth year when the interest rate on the loan increases to 15%. Edward believes prospective investors are adequately informed of the investment's risk. Is Edward behaving ethically? Explain your answer.
TIF 5-1 Ethics in Action Edward Seymour is a financial consultant to Cornish Inc., a real estate syndicate. Cornish fi- nances and develops commercial real estate (office buildings) projects. The completed projects are then sold as limited partnership interests to individual investors. The syndicate makes a profit on the sale of these partnership interests. Edward provides financial information for prospective investors in a document called the offering "prospectus." This document discusses the financial and legal details of the limited partnership investment. One of the company's current projects is called JEDI 2, and has the syndicate borrowing money from a local bank to build a commercial office building. The interest rate on the loan is 6.5% for the first four years. After four years, the interest rate jumps to 15% for the remaining 20 years of the loan. The interest expense is one of the major costs of this project and significantly affects the number of renters needed for the project to break even. In the prospectus, Edward has prominently reported that the break-even occupancy for the first four years is 65%. This is the amount of office space that must be leased to cover the interest and general upkeep costs during the first four years. The 65% break-even point is very low compared to similar projects and thus communicates a low risk to potential investors. Edward uses the 65% break-even rate as a major marketing tool in selling the limited partnership interests. Buried in the fine print of the prospec- tus is additional information that would allow an astute investor to determine that the break-even occupancy jumps to 95% after the fourth year when the interest rate on the loan increases to 15%. Edward believes prospective investors are adequately informed of the investment's risk. Is Edward behaving ethically? Explain your answer.
Financial & Managerial Accounting
14th Edition
ISBN:9781337119207
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Carl Warren, James M. Reeve, Jonathan Duchac
Chapter19: Cost-Volume-Profit Analysis
Section: Chapter Questions
Problem 19.1TIF
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Concept explainers
Partnership Accounting
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings, admission of a new partner, etc.
Partner Admission and Withdrawal
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings of a partner, etc.
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Transcribed Image Text:TIF 5-1 Ethics in Action
Edward Seymour is a financial consultant to Cornish Inc., a real estate syndicate. Cornish fi-
nances and develops commercial real estate (office buildings) projects. The completed projects
are then sold as limited partnership interests to individual investors. The syndicate makes a
profit on the sale of these partnership interests. Edward provides financial information for
prospective investors in a document called the offering “prospectus." This document discusses
the financial and legal details of the limited partnership investment.
One of the company's current projects is called JEDI 2, and has the syndicate borrowing
money from a local bank to build a commercial office building. The interest rate on the loan is
6.5% for the first four years. After four years, the interest rate jumps to 15% for the remaining
20 years of the loan. The interest expense is one of the major costs of this project and significantly
affects the number of renters needed for the project to break even. In the prospectus, Edward has
prominently reported that the break-even occupancy for the first four years is 65%. This is the
amount of office space that must be leased to cover the interest and general upkeep costs during
the first four years. The 65% break-even point is very low compared to similar projects and thus
communicates a low risk to potential investors. Edward uses the 65% break-even rate as a major
marketing tool in selling the limited partnership interests. Buried in the fine print of the prospec-
tus is additional information that would allow an astute investor to determine that the break-even
occupancy jumps to 95% after the fourth year when the interest rate on the loan increases to 15%.
Edward believes prospective investors are adequately informed of the investment's risk.
Is Edward behaving ethically? Explain your answer.
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