Question 3 (1 point) XYZ SA, a hypothetical company, offers its employees a defined benefit pension plan. Information on XYZ's retirement plans is presented in Exhibit 2. It also grants stock options to executives. Exhibit 3 contains information on the volatility assumptions used to value stock options. EXHIBIT 2 XYZ SA Retirement Plan Information 2009 Employer contributions 1,000 Current service costs 200 Past service costs 120 Discount rate used to estimate plan liabilities 7.00% Benefit obligation at beginning of year 42,000 Benefit obligation at end of year 41,720 Actuarial loss due to increase in plan obligation 460 Plan assets at beginning of year 39,000 Plan assets at end of year 38,700 Actual return on plan assets 2.700 Expected rate of return on plan assets 8.00% EXHIBIT 3 XYZ SA Volatility Assumptions Used to Value Stock Option Grants Grant Year 2009 valuation assumptions Weighted Average Expected Volatility for 2005-2009 - 21,50% Grant Year 2008 valuation assumptions Weighted Average Expected Volatility for 2004-2008 - 23.00% Assuming the company chooses not to immediately recognise the actuarial loss and assuming there is no amortisation of past service costs or actuarial gains and losses, the amount of periodic pension cost that would be reported in P&L under US GAAP is closest to: 1) 20. 2) 530. 3) 59. Question 4 (1 point) XYZ SA, a hypothetical company, offers its employees a defined benefit pension plan. Information on XYZ's retirement plans is presented in Exhibit 2. It also grants stock options to executives. Exhibit 3 contains information on the volatility assumptions used to value stock options EXHIBIT 2 XYZ SA Retirement Plan Information 2009 Employer contributions 1,000 Current service costs 200 Past service costs 120 Discount rate used to estimate plan liabilities 7.00% Benefit obligation at beginning of year 42,000 Benefit obligation at end of year 41,720 Actuarial loss due to increase in plan obligation 460 Plan assets at beginning of year 39,000 Plan assets at end of year 38,700 Actual return on plan assets 2,700 Expected rate of return on plan assets 8.00% EXHIBIT 3 XYZ SA Volatility Assumptions Used to Value Stock Option Grants Grant Year 2009 valuation assumptions Weighted Average Expected Volatility for 2005-2009 - 21,50% Grant Year 2008 valuation assumptions Weighted Average Expected Volatility for 2004-2008 - 23.00% The retirement benefits paid during the year were closest to: 1) 3,000 2) 4,000. 3) 280. Question 5 (1 point) Stereo Warehouse is a US retailer that offers employees a defined benefit pension plan and stock options as part of its compensation package. Stereo Warehouse prepares its financial statements in accordance with US GAAP. Peter Friedland, CFA, is an equity analyst concerned with earnings quality. He is particularly interested in whether the discretionary assumptions the company is making regarding compensation plans are contributing to the recent earnings growth at Stereo Warehouse. He gathers information from the company's regulatory filings regarding the pension plan assumptions in Exhibit 1 and the assumptions related to option valuation in Exhibit 2. EXHIBIT 1 Assumptions Used for Stereo Warehouse Defined Benefit Plan 2009: Expected long-term rate of return on plan assets 6.06%; Discount rate 4.85%; Estimated future salary increases 4.00; Inflation 3.00. 2008: Expected long-term rate of return on plan assets 6.14%; Discount rate 4.94%; Estimated future salary increases 4.44%; Inflation 2.72%. 2007: Expected long-term rate of return on plan assets 6.79%; Discount rate 5.38%; Estimated future salary increases 4.25%; Inflation 2.45%. EXHIBIT 2 Option Valuation Assumptions 2009: Risk-free rate 4.6%; Expected life 5.0 years; Dividend yield 1.0%; Expected volatility 29%. 2008: Risk-free rate 3.8%; Expected life 4.5 years; Dividend yield 0.0%; Expected volatility 31%. 2007: Risk-free rate 2.4%; Expected life 5.0 years; Dividend yield 0.0%; Expected volatility 35%. Compared to the reported 2009 financial statements, if Stereo Warehouse had used the same discount rate as it used in 2007, it would have most likely reported lower: 1) net income. 2) cash flow from operating activities. 3) total liabilities. Question 3 (1 point) XYZ SA, a hypothetical company, offers its employees a defined benefit pension plan. Information on XYZ's retirement plans is presented in Exhibit 2. It also grants stock options to executives. Exhibit 3 contains information on the volatility assumptions used to value stock options. EXHIBIT 2 XYZ SA Retirement Plan Information 2009 Employer contributions 1,000 Current service costs 200 Past service costs 120 Discount rate used to estimate plan liabilities 7.00% Benefit obligation at beginning of year 42,000 Benefit obligation at end of year 41,720 Actuarial loss due to increase in plan obligation 460 Plan assets at beginning of year 39,000 Plan assets at end of year 38,700 Actual return on plan assets 2.700 Expected rate of return on plan assets 8.00% EXHIBIT 3 XYZ SA Volatility Assumptions Used to Value Stock Option Grants Grant Year 2009 valuation assumptions Weighted Average Expected Volatility for 2005-2009 - 21,50% Grant Year 2008 valuation assumptions Weighted Average Expected Volatility for 2004-2008 - 23.00% Assuming the company chooses not to immediately recognise the actuarial loss and assuming there is no amortisation of past service costs or actuarial gains and losses, the amount of periodic pension cost that would be reported in P&L under US GAAP is closest to: 1) 20. 2) 530. 3) 59. Question 4 (1 point) XYZ SA, a hypothetical company, offers its employees a defined benefit pension plan. Information on XYZ's retirement plans is presented in Exhibit 2. It also grants stock options to executives. Exhibit 3 contains information on the volatility assumptions used to value stock options EXHIBIT 2 XYZ SA Retirement Plan Information 2009 Employer contributions 1,000 Current service costs 200 Past service costs 120 Discount rate used to estimate plan liabilities 7.00% Benefit obligation at beginning of year 42,000 Benefit obligation at end of year 41,720 Actuarial loss due to increase in plan obligation 460 Plan assets at beginning of year 39,000 Plan assets at end of year 38,700 Actual return on plan assets 2,700 Expected rate of return on plan assets 8.00% EXHIBIT 3 XYZ SA Volatility Assumptions Used to Value Stock Option Grants Grant Year 2009 valuation assumptions Weighted Average Expected Volatility for 2005-2009 - 21,50% Grant Year 2008 valuation assumptions Weighted Average Expected Volatility for 2004-2008 - 23.00% The retirement benefits paid during the year were closest to: 1) 3,000 2) 4,000. 3) 280. Question 5 (1 point) Stereo Warehouse is a US retailer that offers employees a defined benefit pension plan and stock options as part of its compensation package. Stereo Warehouse prepares its financial statements in accordance with US GAAP. Peter Friedland, CFA, is an equity analyst concerned with earnings quality. He is particularly interested in whether the discretionary assumptions the company is making regarding compensation plans are contributing to the recent earnings growth at Stereo Warehouse. He gathers information from the company's regulatory filings regarding the pension plan assumptions in Exhibit 1 and the assumptions related to option valuation in Exhibit 2. EXHIBIT 1 Assumptions Used for Stereo Warehouse Defined Benefit Plan 2009: Expected long-term rate of return on plan assets 6.06%; Discount rate 4.85%; Estimated future salary increases 4.00; Inflation 3.00. 2008: Expected long-term rate of return on plan assets 6.14%; Discount rate 4.94%; Estimated future salary increases 4.44%; Inflation 2.72%. 2007: Expected long-term rate of return on plan assets 6.79%; Discount rate 5.38%; Estimated future salary increases 4.25%; Inflation 2.45%. EXHIBIT 2 Option Valuation Assumptions 2009: Risk-free rate 4.6%; Expected life 5.0 years; Dividend yield 1.0%; Expected volatility 29%. 2008: Risk-free rate 3.8%; Expected life 4.5 years; Dividend yield 0.0%; Expected volatility 31%. 2007: Risk-free rate 2.4%; Expected life 5.0 years; Dividend yield 0.0%; Expected volatility 35%. Compared to the reported 2009 financial statements, if Stereo Warehouse had used the same discount rate as it used in 2007, it would have most likely reported lower: 1) net income. 2) cash flow from operating activities. 3) total liabilities