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A U.S. company performs a quantitative analysis of the suffiiency of a newly-formed special purpose entity's equity to absorb expected losses. The SPE was formed
A U.S. company performs a quantitative analysis of the suffiiency of a newly-formed special purpose entity's equity to absorb expected losses. The SPE was formed with $12,125 in equity and $107,875 in debt, for a total fair value of $120,000. Assume the SPE's expected net cash inflows all occur at the end of one year. Expected cash flows and probabilities are:
Expected net cash flow | Probability |
---|---|
$195,000 | 0.50 |
58,500 | 0.40 |
39,000 | 0.10 |
The U.S. company uses a risk-adjusted discount rate of 4 percent to determine the present value of cash flows. The SPE's expected losses are
A) $8,250
B) $25,500
C) $60,000
D) $33,750
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