Can the goal of maximizing the value of a Company’s stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the environment and the general good of society fit in this framework, or are they ignored?
When Luckin Coffee (NASDAQ: LK) (“Luckin” or the “Company”) went public in May 2019, it was a business attempting to instill the culture of drinking coffee into Chinese consumers through cut-throat discounts and free giveaway coffee. Right after its IPO on NASDAQ, the Company had evolved into a fraud by fabricating financial and operating numbers starting in the 3rd quarter of 2019. It delivered a set of results that showcased a dramatic growth in its revenues and sent its stock price up over 160% in a little over 2 months. Not surprisingly, it wasted no time to successfully raise another $1.1 billion in January 2020. Luckin’s management knew what investors were looking for, how to position itself as a growth stock with a fantastic story, and what key metrics to manipulate to maximize investor confidence.
Based on what you have read so far and any research you have done, how could this accounting fraud have been avoided? Will it impact future Chinese company IPO listings in the United States? Were there any red flags you spotted in their reported numbers?
In 2017, a health worker in Massachusetts won the Powerball jackpot for $759 million. She was given a choice of how to take the money: as an annuity or as a lump sum. Choosing the annuity option distributes the jackpot over 30 payments, which increases by 5% each year to keep up with the cost of living. To see an example of how this annuity works, please go to: Powerball Annuity Cashflow Calculator.
The lump sum method means taking the entire cash value at once, but there’s a catch: The lump sum is less than the value of the total jackpot. For the winner, the lump sum meant she would receive $480 million or $336 million after taxes.
The health care worker, Ms. Mavis L. Wanczyk, age 53, quit her job, came forward immediately and without consulting with a financial advisor or counsel chose the lump sum method of collecting her winnings.
Based on what you have learned in week 4, would you have done anything different than Ms. Wanczyk? Would you rather have preferred a structured payout (annuity) per year for the next 30 years or accept the money upfront and pay all the taxes in the year you won? What factors would you consider in making your decision? Would you have quit your job? Would you have consulted with a financial advisor or tax or legal counsel? Does your age matter (if you died, the annuity payments would continue to be paid to your estate)? Please discuss.
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