Hewlett Packard reported the following information on its U.S. retiree medical plan:

Key Assumptions 1998 1997 1996 Discount rate 6.5% 7.0% 7.5%

Expected return on assets 9.0% 9.0% 9.0%

Current medical cost trend rate 8.65% 9.6% 10.0%

Ultimate medical cost trend rate 5.5% 6.0% 6.0%

Year current medical cost trend rate decreases to ultimate rate 2007 2007 2007 Effect of a 1% increase in the medical cost trend rate (millions):

Increase in benefit obligation $116% $101% $90%

Increase in annual retiree medical cost $17% $15% $13%

Funding Status (in millions) 1998 1997 Fair value of plan assets $503 $448 Benefit obligation (543) (475)
Plan assets in excess of (less than) benefit obligation (40) (27)
Unrecognized net experience (gain) loss (255) (268)
Unrecognized prior service cost (benefit) related to plan changes (144) (154)
Prepaid (accrued) costs $(439) $(449)

What assumption is Hewlett Packard making about medical cost inflation in 2000 and 2010? What is the firm assuming it will earn on plan assets? As a financial analyst, how would you evaluate these assumptions? Are these rates reasonable? In 1998, what is the liability for the medical plan reported on the balance sheet? Is the plan over- or underfunded? What other factors would you consider in evaluating Hewlett Packard’s liability and risk under its medical plan?AppendixLO1