Homework Help for Finance (page 1362)

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You and two friends, Pat and Ron, have decided to form a new business, running a restaurant. Your friends, pat and Ron, bring the following to the business: Pat is something of an entrepreneur. He has several ventures and ready access to financing for your business. Because of his varied interests, however, he doesn’t want to be an employee of the business. He does, however, want to have some input into the management of the business. Ron has a full time job, which she is willing to leave to make a full time commitment to running this restaurant. She has limited funds available and hopes to develop “sweat equity” in the restaurant through her work effort. She is a skilled chef who will manage the kitchen and the food production. You are the “idea person”. You have conceived of this enterprise, and are charged with getting everything lined up. You will be involved in the day-to-day running of things, and will be the manager of the business side of the restaurant.

II. Having chosen the form of business, you also need to arrange financing to obtain all of the kitchen equipment, dining room equipment, stock the bar, purchase food, pay rent, get operating capital for the first two months of operation, and a million other details. A arranges through his sources to get financing. The lender requires that you do whatever is necessary to minimize his risk and each of the three of you to be responsible for the loan. Include all of the forms of financing and lending that we have discussed in this case. What are the options, which ones are best, and how do they work?

You are the CEO of a small pharmaceutical company. Your company is privately held, with 75 shareholders; however, you own a majority of the shares and thus, you maintain control over the Board of Directors. Your company successfully developed and patented a drug to treat a rare blood disease. You have recouped your research and development costs on the drug and are making a profit by selling the pills at $10 each. Because the number of people with the disease is very small, no other companies have entered into the market for this drug. Big Drugs, Inc. has approached you about acquiring the rights to the drug. Big Drug’s offer is substantial and if you were to accept it, you would likely be able to fund research for a drug for a related, and also rare and debilitating disease. However, you have heard speculation by many in the industry that Big Drug has been implementing a strategy of buying up the patents on rare disease/small market drugs in order to raise the prices significantly. The last purchase of this type by another big pharma company resulted in an increase in the price from $15.00 per pill to $500 per pill. Meanwhile, the FDA is investigating the price hikes of certain drugs. The agency is considering a program to subsidize the prices through an arrangement with insurance companies. The proposed subsidy would allow you to increase the price to approximately $14.00 per pill. Even with this increase, however, your profits will fall far short of the amount to be gained from the Big Drug purchase offer. You need to respond to the offer from Big Drug. You are pretty confident that selling will result in a price hike that will create an immense hardship on the patients using the drug. Your investors are anxious for you to seize the opportunity to turn a tidy profit and have sufficient resources to boost your R&D. As you consider how to advise the Board of Directors, what are the ethical considerations involved in this decision? Choose two ethical theories that you studied this term that you think can help you make the “right” decision. Describe how those theories apply to this situation, and what decision would be ethical using each of the theories. Finally, what is your recommendation to the Board of Directors? Use the IRAC format to respond to the question.


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