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In the Enron case, the company eventually turned to “back-door” guaranteeing of the debt of Chewco, one of
its SPEs, to satisfy equity investors. Assume that a $16 million loan agreement required that Enron stock
should not fall below $40 per share. If the share price did decline below that trigger amount, either the loan
would be called by the bank or the bank could choose to increase the guaranteed number of Enron shares
based on the new price (assume $32). If the bank decides to increase the number of shares guaranteed, what
would be (1) the original number of shares in the guarantee and (2) the new number of shares? Why would it
be important from an accounting and ethical perspective for Enron to disclose information about the guarantee
in its financial statements?
Sample Solution
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