Lawrence Keen is the President of the Safe Water Filter Company. As President, he is in control of the issuance of stocks and Bonds. Three years ago when the company needed cash, Lawrence purchased from the company a $100,000, 4 percent, 10-year unsecured bond. The interest rate has begun to increase. Lawrence suggests that the company refinance the bonds to extend the life of the bonds, even though the interest rate has increased to 7 percent.
Using the following formula:
I = Principal * Rate * Time
Legacy Financing:
I = $100,000 * 4% * 10 = $40,000
Proposed Financing:
I = $100,000 * 7% * 10 = $70,000
If the legacy financing arrangement was in place for the entire 10-year period, Mr. Keen would have earned $40,000 in interest income. However, if the company refinances for a longer term and at a higher rate, it will allow Mr. Keen the opportunity to earn $70,000 over 10 years.
Does allowing Mr. Keen the opportunity to earn additional interest income under the revised financing agreement create a conflict of interest? Why or why not?