molex case finished

molex case finished - Question 1 We believe that Molex has...

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Question 1 We believe that Molex has significantly overstated income and that it should be disclosed to shareholders. The error has a $0.03 effect on overall earnings per share of $0.30. Thus EPS has been overstated by a whopping 10%. The case does not mention Molex’s actual trading price, but if for example the company was trading at a 10x P/E multiple, this would mean Molex’s stock price would drop from $30 to $27. If this error would be disclosed, it is also possible that Molex’s P/E multiple would fall even lower due to investor uncertainty with future results. We believe shareholders would find this amount especially significant. The $0.03 error would also result in Molex lowering its EPS from $0.30 to $0.27. This would mean the company would no longer have beaten Wall Street earnings estimates and would be at the low range of its own projects. Stocks that do not meet their earnings targets usually experience sharp price drops very quickly. Thus, Molex would be hiding key information from its shareholders and the value of their investment. Since many prospective investors look at past earnings for an indication of future results, their views on Molex and its future earning power would be grossly overstated (by 10% or more.) As one can see, we feel this number would have a significant effect on Molex stock price and should be recognized and restated. Question 2 A) The corporate finance group first identified this error in mid-July of 2004. This period of time was on the heels of the bursting of the “dot-com bubble.” The extreme rise in investment and speculation on companies in the Internet and tech sectors occurred between 1995 and 2001 (wisegeek.com). Molex is not directly involved with the Internet phenomenon, but many of their product offerings facilitate a machine’s ability to access it. Their electrical and fiber optic interconnect solutions are essential to complete the inner workings of both computers and servers. Due to the fact that many of these companies had fallen on hard times after the fallout of the burst, Diane Bullock (CFO) and Joe King (CEO) were probably trying to maintain as positive of an image in the marketplace as possible. There were also major changes being made in the auditing business at this time. After the corporate scandals in 2002 and 2003 (including Worldcom, Adelphia, and Enron) increased focus was directed towards proper accounting. This even included regulation, such as the Sarbanes-Oxley act of 2003. After seeing the backlash against people like Bernard Ebbers (CEO of Worldcom), it is possible that King and Bullock were so scared to come forward right away because they thought this inaccuracy could be misconstrued as malicious. B) The years preceding the discovery of this accounting problem had been very grim for Molex. The
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This document was uploaded on 11/02/2011 for the course FIN 485 at Miami University.

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molex case finished - Question 1 We believe that Molex has...

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