FIRST PUBLISH OCTOBER 2024
FINA 470 - Exam 2 Final Exam Study
Guide Solutions
Pension Plan - ANSWER✔✔employer promises monetary benefits to employees after retirement
Contribution Plan - ANSWER✔✔plan specify the amount of pension contribution that the employer
makes to the plan
Who are the three Parties to a pension plan? - ANSWER✔✔employer, pension fund, employee
What is the most common type of defined contribution pension plan? - ANSWER✔✔401 - K
How does a company determine the annual cost of a defined benefit pension plan? - ANSWER✔✔1.
Determine how much is the annual benefit for how many years
2. Determine the PV of the above payments
3. Determine how many years to spread the cost
Need to determine the following related to each employee: - ANSWER✔✔- life expectancy
- employee turnover
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FIRST PUBLISH OCTOBER 2024
- compensation growth
- expected rates of return
- interest rates
Who can assist with determining and calculating the needed information? - ANSWER✔✔an actuary
How much is required to be expensed each year so that the amount needed to be accured at the time of
an employee's retirement is achieved? - ANSWER✔✔PV of an Annuity
How do we determine the number of years in which to accrue the expense? - ANSWER✔✔the estimated
remaining years of employment
Pension plan - ANSWER✔✔Agreement by the employer to provide pension benefits involving 3 entities:
employer-who contribute, employee-who derives benefit, and pension fund
pension fund - ANSWER✔✔account administered by a trustee, independent of employer, entrusted with
responsibility of receiving contributions, investing them in a proper manner, & disbursing pension
benefits to employees
vesting - ANSWER✔✔specifies employee's right to pension benefits regardless of whether employee
remains with the company or not; usually conferred after employee has served some minimum period
with the employer
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, ©EMILLECT 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
Defined Benefit - ANSWER✔✔a plan specifying amount of pension benefits that employer promises to
provide retirees; employer bears risk of pension fund performance
Defined Contribution - ANSWER✔✔a plan specifying amount of pension contributions that employers
make to the pension plan; employee bears risk of pension fund performance
Does a company prefer a defined contribution plan or defined benefit plan? - ANSWER✔✔Company's
prefer defined contribution plans since the amount of expense can be modified each year and the
expense amount can easily be determined. The expense amount of a defined benefit plan is much more
difficult to determine and the amount in future period can fluctuate significantly.
What are CFO desired goals? - ANSWER✔✔Steady earnings, limited disclosure, footnote only if possible,
least impact on earnings, least fluctuation on earnings, least recorded amount of a liability.
Why is interest cost portion of pension expense? - ANSWER✔✔To compensate for the liability amount
being discounted.
Why is return on plan assets considered a negative expense? - ANSWER✔✔The earnings from plan
assets is a source of funding the plan.
Economic pension cost - ANSWER✔✔net cost arising from changes in net economic position for a period;
included both recurring and nonrecurring components along with return on plan assets
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