Softek Corporation forms a separate legal entity, Startek, to develop new technology. The entity is funded by

Question:

Softek 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:
Cash FlowProbability
$11,000,000 ............... 0.40
33,000,000 ................. 0.20
55,000,000 ................. 0.40
A of 10 percent is appropriate. Required
a. Assume qualitative analysis of Startek's VIE status is inconclusive. Quantitatively analyze whether! Startek is a variable interest entity.
b. Assume Startek is a variable interest entity. Identify the factors that determine whether Softek is the primary beneficiary that must consolidate Startek. Corporation
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