(1) The First National Bank Sells automobile loans to a separate entity known as Auto Finance Partners (AFP). AFP is financed with 89% debt and 11% equity issued to an independent investor. First National Bank’s risk is virtually nonexistent.
Triple A Company wants to build a new manufacturing plant and creates a separate entity known as Property Finance Incorporated (PFI). PFI borrows 90% of the construction cost. In order to entice the construction lender to fund the project, Triple A had to agree to pledge its common stock as additional collateral.
Are AFP and PFI considered variable interest entities?
(2) Assuming a company issues new equity to acquire a target company and the two market value of the target’s assets is greater than the book value, which of the two methods, purchase and pooling, will likely produce the higher balance for total assets?