Part $1.$ Tucker Company has an asset in the form of a cash flow that it expects to collect in three years. However, the amount of the cash flow is not certain. These are the

probabilities underlying the cash flow.

The discount rate is $10\%.$

Required:

a$.$ How should the asset be valued according to SFAC No$.7?$

b$.$ What other valuation is possible?

c$.$ Which valuation do you prefer?

Part $2.$ Donahoe Company has a liability of $$10,000,$ which is due in three years. The discount rate applicable to the liability is $10\%.$ Assume that the firm $\text{'}$ s credit standing is

adversely affected by an untoward economic event. As a result, the discount rate applicable to the liability goes up to $12\%.$

Required:

a$.$ How does the value of the liability change?

b$.$ If the firm $\text{'}$ s financial condition worsens, does it make sense for the value of the liabilities to decline? Explain.