Dendeng Financial Group forms a separate legal entity, TCom, to provide financing services for Dendeng and other companies. The entity is financed by $397 million, of which $300 million is unsubordinated debt financing, and the remainder is equity funding obtained from outside investors. TCom is expected to operate for one year and generate the following cash flows at the end of the year (in millions):
$$\begin{array} { | c | c | }
\hline \text { Expected Cash Flows } & \text { Probability } \
\hline \$ 540 & 0.60 \
\hline 504 & 0.20 \
\hline 336 & 0.10 \
\hline 180 & 0.10 \
\hline
\end{array}$$ A risk-adjusted discount rate of 20% is appropriate.
Required a. Is TCom a variable interest entity, per U.S. GAAP? Provide both qualitative and quantitative evaluations.
b. Based on your conclusion in part a., who should consolidate TCom? Explain how this decision is made.

Question

Dendeng Financial Group forms a separate legal entity, TCom, to provide financing services for Dendeng and other companies. The entity is financed by $397 million, of which $300 million is unsubordinated debt financing, and the remainder is equity funding obtained from outside investors. TCom is expected to operate for one year and generate the following cash flows at the end of the year (in millions):
 $$\begin{array} { | c | c | } 
\hline \text { Expected Cash Flows } & \text { Probability } \
\hline \$ 540 & 0.60 \
\hline 504 & 0.20 \
\hline 336 & 0.10 \
\hline 180 & 0.10 \
\hline
\end{array}$$ A risk-adjusted discount rate of 20% is appropriate.
Required a. Is TCom a variable interest entity, per U.S. GAAP? Provide both qualitative and quantitative evaluations. 
b. Based on your conclusion in part a., who should consolidate TCom? Explain how this decision is made.

Quizplus · Accepted Answer

The Answer of Dendeng Financial Group forms a separate legal entity, TCom, to provide financing services for Dendeng and other companies. The entity is financed by $397 million, of which $300 million is unsubordinated debt financing, and the remainder is equity funding obtained from outside investors. TCom is expected to operate for one year and generate the following cash flows at the end of the year (in millions):
 $$\begin{array} { | c | c | } 
\hline \text { Expected Cash Flows } & \text { Probability } \
\hline \$ 540 & 0.60 \
\hline 504 & 0.20 \
\hline 336 & 0.10 \
\hline 180 & 0.10 \
\hline
\end{array}$$ A risk-adjusted discount rate of 20% is appropriate.
Required a. Is TCom a variable interest entity, per U.S. GAAP? Provide both qualitative and quantitative evaluations. 
b. Based on your conclusion in part a., who should consolidate TCom? Explain how this decision is made.

Dendeng Financial Group Forms a Separate Legal Entity, TCom, to Provide