Question 1:

BTN 14-3 Traverse County needs a new county government building that would cost $10 million. Thepoliticians feel that voters will not approve a municipal bond issue to fund the building since it wouldincrease taxes. They opt to have a state bank issue $10 million of tax-exempt securities to pay for the buildingconstruction. The county then will make yearly lease payments (of principal and interest) to repay theobligation. Unlike conventional municipal bonds, the lease payments are not binding obligations on thecounty and, therefore, require no voter approval.Required1. Do you think the actions of the politicians and the bankers in this situation are ethical? How do the tax-exempt securities used to pay for the building compare in risk to a conventional municipal bond issued by Traverse County?

Question 2:

Katie Murphy is preparing for a meeting with her banker. Her business is finishing its

fourth year of operations. In the first year, it had negative cash flows from operations. In

the second and third years, cash flows from operations were positive. However, inventory

costs rose significantly in year 4, and cash flows from operations will probably be down

25%. Murphy wants to secure a line of credit from her banker as a financing buffer. From

experience, she knows the banker will scrutinize operating cash flows for years 1 through 4

and will want a projected number for year 5. Murphy knows that a steady progression

upward in operating cash flows for years 1 through 4 will help her case. She decides to use

her discretion as owner and considers several business actions that will turn her operating

cash flow in year 4 from a decrease to an increase.

Required

1. Identify two business actions Murphy might take to improve cash flows from operations.

2. Comment on the ethics and possible consequences of Murphy's decision to pursue these

actions.