Question

Softek Corporation forms a separate legal entity, Startek, to develop new technology. The entity is funded by $4,000,000 in outside equity and $26,000,000 in debt. Softek guarantees Startek’s debt. The entity is expected to generate the following cash flows at the end of one year:

Quest 2 Partially correc Mark 20.69 out of 30.00 P Flag question Identification of Variable Interest Entity and Primary Beneficiary Softek Corporation forms a separate legal entity, Startek, to develop new technology. The entity is funded by $4,000,000 in outside equity and $26,000,000 in debt. Softek guarantees Startek's debt. The enti Cash Flow Probability 511,000,000 0.40 33,000,000 0.20 55.000.000 0.40 A discount rate of 10 percent is appropriate Required Assume qualitative analysis of Startek's VIE status is inconclusive. Quantitatively analyze whether Startek is a variable interest entity. Instructions • Use negative signs with your answers, when appropriate Enter 5 answers in millions ($11,000,000 equals $11 million). • Enter Probability answers using decimals. Expected Cash Flow Present Value Probability 04 Expected PV Investment Fair Value 26 M Residual Returns 4 X O Expected Gains OS Expected Losses OX 0 O 04 6 20 30 OM OX O 0 OM OM Check Marie forum 200.00 G D Save Answers

Answer 1

All amounts are in $ and in millions

The answer is inserted as a picture

Exected Present stobability Expected Investment Residad Expected expected CA Value PV fair value beturns goins fo ماي 0.4 $18 $ 4 $(20) $30 a $33 0-2 $55 $ 30 $50 $ 20 & 30 $20 $8 0 1930 cs $8 $18) Scanned with CamScanner

The Expected losses = $8 million

Equity = $4 million

Since equity is insufficient to meet expected losses, it can be classified as Variable Interest Entity (as per Quantitative analysis)

Note :

Present value is calculated by discounting expected Cashflow at 10%

Expected PV is multiplication of Present value with Probability

Investment fair value = Equity plus debt = $4 + $26 = $30

Residual returns = Present value - Investment fair value

Expected gain/loss = Residual return x Probability