A U.S. company performs a quantitative analysis of the sufficiency of a newly-formed special purpose entity's equity to absorb expected losses. The SPE was formed with $l l ,250 in equity and $99,750 in debt, for a total fair value of $111,000. 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
$156,000............................0.65
46,800...............................0.20
31,200...............................0.15
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. $12,150
b. $13,200
c. $18,150
d. $25,350