EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 18, Problem 4QP
Summary Introduction
To discuss: The manager’s focus on short term goals such as sales and earnings per share and its implications on long term goals of the company.
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Plan Funding
Consolidated Industries is planning to operate for 10 more years and then cease operations. At that time (in 10 years), it expects to have the following pension benefit obligations:
Year
11-15
16-20
21-25
Annual Total Payment
$3,500,000
3,000,000
2,500,000
26-30
31-35
2,000,000
1,500,000
The current value of the firm's pension fund is $6.1 million. Assume that all cash flows occur at year-end.
a. Consolidated's expected return on pension assets is 12%, and it uses 12% to discount the expected pension benefit payments. What is the present value of the firm's pension fund
benefits? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
b. Is the plan underfunded or overfunded? Do not round intermediate calculations. Round your answer to two decimal places.
Funding ratio =
which means the assets are -Select- than the PV of benefits and the plan is -Select- ☑.
Less or Greater
Overfunded or Underfunded
Benefits and Contributions
The Certainty Company (CC) operates in a world of certainty. It has just hired Mr. Jones, age 27, who will retire at age 65, draw retirement benefits for 14 years, and die at age 79. Mr. Jones'
salary is $21,000 per year, but wages are expected to increase at the 6% annual rate of inflation. CC has a defined benefit plan in which workers receive 1% of the final year's wage for each year
employed. The retirement benefit, once started, does not have a cost-of-living adjustment. CC earns 12% annually on its pension fund assets and uses a 10% rate to discount its expected future
benefit payments. Assume that pension contribution and benefit cash flows occur at year-end. Do not round intermediate calculations. Round your answers to the nearest dollar.
a. How much will Mr. Jones receive in annual retirement benefits?
$
b. What is CC's required annual contribution to fully fund Mr. Jones' retirement benefits?
$
c. Assume now that CC hires Mr. Smith at the same…
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Chapter 18 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
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