PROBLEM 3–6 Refer to Colgate’s Annual Report in Appendix A at the end of the book and answer the following questions:

a. Make necessary financial adjustments to reflect the net economic position of the pension and OPEB plans on the balance sheet and the economic benefit cost in income for 2006 and 2005. What effects do these adjustments have on the following ratios: (1) debt to equity, (2) long-term debt to equity, (3) ROE, and (4) ROA? Discuss the appropriate presentation (and recognition) of postretirement benefits on the balance sheet and in net income for different analysis objectives.

b. Evaluate the reasonableness of the key actuarial assumptions made by Colgate in 2006 and 2005. Why are the assumptions different for domestic and international pension plans? What are the effects of changes in assumptions in 2006 on the financial statements?

c. What is the nature of Colgate’s risk exposure from its pension and OPEB plans? Quantify this risk, examining the extent of underfunding, pension (OPEB) intensity, and likely mismatch in the risk profiles of plan assets and obligation.

d. Examine the nature of Colgate’s contributions to the benefit plans. How useful are current contributions to estimate future contributions? Is it possible to estimate Colgate’s cash flows with respect to its benefit plans in 2007 and thereafter?