Question
19. (CH3) Exactly five years from today, assume that your $160M DB plan must make a $30.0M payment. The payment is quoted in todays dollars,
19. (CH3) Exactly five years from today, assume that your $160M DB plan must make a $30.0M payment.The payment is quoted in todays dollars, thus you do not need to adjust for annual inflation of 2.0%. You do, however, need to account for an annual tax rate of 35.0%, which will be applied to any appreciation of YOY plan assets. In order to make the payment five years from now without falling below the original $160M in plan assets, the required real rate of before tax return is closest to:
A. 1.2%
B. 2.3%
C. 3.5%
D. 5.4%
E. 5.8%
20. (CH3) Ignore the payment in question 18 and instead assume that your $160M DB plan is just madea $15M fund liability payment (T=0). The DB plans total liabilities are equal to all future liability payments (which are forecasted to appreciate at a real rate of 4.0% per year). Your actuaries agree that a 10.0% discount rate would be most appropriate for the future liability payments and that the future liability payments should be adjusted 2.0% per year for inflation. The DB plan is over/under funded based on the difference between current plan assets and total liabilities. What is the status of the fund?
A. The pension is overfunded by $10 M
B. The pension is overfunded by $4 M
C. The pension is underfunded by $14 M
D.The pension is underfunded by $238 M
E. The pension is underfunded by $253 M
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