Section 1 Determining whether and entity is a VIE (Hint: 3 of the 4 are VIEs) Example 1: Company A holds a 65% equity interest in Entity 1 and Company B holds the remaining 35% equity interest. Company A and Company B share in Entity 1s profits and losses in proportion to their relative equity investment. Entity 1s governing documents include specific provisions providing Company B with approval rights over the substantive operating decisions of Entity 1 (i.e., joint control). Is Entity 1 a VIE? Why or why not? Example 2: Company A is an equity investor in Corporation X, holding 55% of Corporation Xs voting interests. Through its 55% voting interest, Company A can control Corporation X. Company A is exposed to 60% of Corporation Xs profits and losses. Is Corporation X a VIE? Why or why not? Example 3: Entity Z is formed with 30,000 of equity and 70,000 of debt. Company A contributed $10,000 of cash into Entity Z at formation in exchange for 33% of Entity Zs common stock. The remainder of Common stock is held by a disperse group of equity holders. Company As equity investment participates pro rata in Entity Zs profits and losses. However, the terms of Company As interest stipulate that it must receive, at a minimum, an annual 8% rate of return on its investment. It is expected that the entity will earn $3,000 a year after paying interest on the debt (a return of 10% on the initial equity), but there is substantial variation in the possible outcomes. In the event that there is not sufficient cash to pay interest on the debt and Companys A 8% return, then Company As 8% return is paid first. Does Entity Z qualify as a VIE? Why or why not? Example 4: Alpha Company is set organized as follows: The firm issues debt of $250 and common stock of $50 Using the $300 of proceeds, Alpha acquires a bond with a fair value of $300. Alpha Company enters into a total-return swap with Mega Bank. The terms of the arrangement provide that Mega Bank will pay 90% of the total return of the bond in exchange for a LIBOR-based return. That is, if the bonds value declines by one dollar, the Bank B will pay the entity 90%. Does the total-return swap cause Company A to be a VIE?