FINA 470 - Exam 2 Final Exam Study Guide Solutions

FINA 470 - Exam 2 Final Exam Study Guide Solutions Pension Plan - ANSWERemployer promises monetary benefits to employees after retirement Contribution Plan - ANSWERplan specify the amount of pension contribution that the employer makes to the plan Who are the three Parties to a pension plan? - ANSWERemployer, pension fund, employee What is the most common type of defined contribution pension plan? - ANSWER401 - K How does a company determine the annual cost of a defined benefit pension plan? - ANSWER1. 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 ©EMILLECT 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 2/16 - compensation growth - expected rates of return - interest rates Who can assist with determining and calculating the needed information? - ANSWERan 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? - ANSWERPV of an Annuity How do we determine the number of years in which to accrue the expense? - ANSWERthe estimated remaining years of employment Pension plan - ANSWERAgreement by the employer to provide pension benefits involving 3 entities: employer-who contribute, employee-who derives benefit, and pension fund pension fund - ANSWERaccount 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 - ANSWERspecifies 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 ©EMILLECT 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 3/16 Defined Benefit - ANSWERa plan specifying amount of pension benefits that employer promises to provide retirees; employer bears risk of pension fund performance Defined Contribution - ANSWERa 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? - ANSWERCompany'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? - ANSWERSteady 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? - ANSWERTo compensate for the liability amount being discounted. Why is return on plan assets considered a negative expense? - ANSWERThe earnings from plan assets is a source of funding the plan. Economic pension cost - ANSWERnet cost arising from changes in net economic position for a period; included both recurring and nonrecurring components along with return on plan assets ©EMILLECT 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 4/16 service cost - ANSWERa recurring pension cost where an actuarial present value of pension benefit earned by employees interest cost - ANSWERa recurring pension cost. An increase in projected benefit obligation arising when pension payments are one period closer to being made; computed by multiplying beg period PBO by the discount rate Accumulated benefit obligation (ABO) - ANSWERactuarial presen