Scruffy Murphy is the president and principal stockholder of Scruffy's Bar and Grill Inc. To expand the business, the corporation is applying for a $250,000 bank loan. To increase the chance of getting the loan, Murphy is considering two options for beefing up the owners' equity of the corporation:
Option 1: Issue $100,000 of common stock for cash. A friend has been wanting to invest in the company. This may be the right time to extend the offer.
Option 2: Transfer $100,000 of Murphy's personal land to the corporation, and issue common stock to Murphy. Then, after obtaining the loan, Murphy can transfer the land back to himself and zero out the common stock.
Using your judgment, please answer the following:
1. 1.What is the ethical issue?
2. 2. Who would be affected by the choice between these two options? And what are the possible consequences to them?
a. Option 1
b. Option 2
3. 3. What do you think about these two options from the following standpoints:
a. Economic:
b. Ethical:
4. 4. What would you do? How would you justify your decision?