Business Valuation (A) Solution

Question 1: Identify all the impacted parties. What is at stake for each person involved?
Question 2: What should Isabel do?

Answer 1: The following are impacted parties in this case:

1. ABC Group: The finance division of ABC Group is conducting this valuation. Their
stakes in this transaction include their corporate reputation, and long-term trust with their
clients. If the transaction, at any point, is investigated or (buying and selling) parties are
prosecuted by tax or drug enforcement agencies, it may also entail consequences for the
ABC Group, being the intermediary, which will seriously hurt its reputation in addition to
possible criminal or civil sanctions.

2. Isabel: As the primary decision-maker, her professional integrity, career prospects, and
personal values are at stake. This is a challenging situation for Isabel. If she complies
with Arturo's request, she compromises her ethical standards but might receive a bonus,
secure her position and future opportunities in the company. Refusing could mean job
loss or professional backlash, although refusing it aligns with her personal values and
ethical upbringing.

3. Arturo (General Manager): He is a key stakeholder in this case. His professional

reputation, the potential financial gain from the hotel sale, and his position within the
company are at stake. There is a possibility that he might be under pressure to inflate the
valuation for personal gain or to meet company targets. His actions suggest a possible
willingness to engage in unethical practices.

4. Seller of Hotel: They could be seeking to inflate the hotel's value for a higher sale price,
which is unethical if not strictly illegal. However, there is also considerable
circumstantial evidence that the seller of hotel (present owner) may have used the hotel as
a front for money laundering. If the actual value of hotel is COP 500 million, and the
owner(s) declare the transaction at COP 800 million, the transaction would raise red flags
 for the authorities due to exorbitant overvaluation, and the case may likely be flagged for
investigation for tax and money laundering offences.

5. Buyer of Hotel: The buyer risks overpaying for the property based on a manipulated
valuation, which could lead them to financial loss. However, the buyer of hotel may be
aware of this, and is likely investing the drug money in purchase of hotel, with the
likelihood that they would continue to use the hotel for money laundering in future.

6. Fernanda (Accountant): She is the accountant working on behalf of the other side. Her
professional integrity is also at stake if she is complicit in overvaluing of this transaction,
which seems likely in the circumstances.

7. Colleagues of Isabel (other employees at ABC Group): Their potential job security is
at stake, if the company's reputation is harmed because of its involvement in illegal
transactions.

8. Isabel’s Family: Isabel’s family had a significant influence on her values which is
evident from the case. Isabel’s decision might affect her family’s pride in her
accomplishments and her career. It will be a great cause of concern for her family if they
find out that Isabel is implicated in any dubious and illegal activity. Not just Isabel’s
professional reputation is at stake, but her and her family’s social reputation is also at
stake.

9. Colombian Government and its Regulatory Authorities: Tax and drug enforcement
authorities are the relevant law enforcement agencies in this scenario. Hence, they are
also stakeholders. It is the responsibility of these agencies to monitor and detect illegal
activities at such a large scale happening in their jurisdiction.

10. Financial Sector: When such misconducts and illegal practices are revealed, they turn
into scandalous news all over the market. Overall trust in financial institutions and
markets are thus hurt. If ABC Group’s involvement in an illegal transaction is unearthed
at some point, it might impact the financial markets.

Each party has different stakes in the situation, ranging from personal and professional integrity
to financial gains and legal consequences. Isabel's decision thus has far-reaching implications
beyond her immediate professional environment.
Answer 2: Isabel does not have any conclusive evidence at this point that the transaction
involves an illegal activity, despite suggestive circumstances. However, she is pushed to do
something by her GM which is unprofessional and unethical. As a professional valuation/finance
expert, she is expected to give an accurate and correct opinion on the value of hotel.

Isabel's situation is a classic case of ethical conflict in the corporate world, requiring a delicate
balance between professional responsibilities and personal values. The approach she chooses
should reflect not only her personal ethics but also a strategic understanding of her professional
environment and potential consequences. Following are some key considerations that Isabel
should do or keep in mind:

1. Document Everything: First and foremost, she should keep a detailed record of all
activity on the assignment, including her original calculation and instructions and
communications related to this valuation. She should also maintain a note-sheet in the file
that documents all instructions given to her by GM after she conducted her original
valuation. Additionally, she should also keep a photocopy of the entire file with her as
evidence, in case if she is later implicated in any litigation or investigation. Her priority
should be to first save her own skin from any possible complication and consequences.

2. Submit both workings to Arturo with a disclosure note: We should also keep in mind
that what is happening at the hotel at large is not Isabel’s concern at this stage. If I were
at her place, I would prepare both workings next to each other (on a single page) with
alternative values of WACC, along with a footnote explanation clearly citing the “actual”
WACC vs. a “hypothetical” one (which the GM wanted), along with bases for both or
lack thereof; and let the GM decide which one he wants to go ahead with.

Isabel should be cautious of making far-fetched assumptions at this stage, and instead
focus on doing her work professionally. Instead of outrightly refusing to comply with a
preconceived mind, she could present workings based on both scenarios to Arturo, along
with her honest opinion written alongside. When she emails the results, her opinion
would already be documented and recorded, for any future reference. Thus, the onus
would not fall on Isabel for being complicit.
 3. Discuss concerns with Arturo: Another option for her is to communicate her discomfort
with the instructions to alter the valuation with her GM, citing ethical and potentially
legal concerns. However, this would likely not lead to anywhere as Arturo seems to have
made up his mind.

Things that Isabel should not do at this stage:

 Accuse her GM of any wrongdoing.

 Resign.
 Whistleblow.