Exam 3: Analyzing Financing Activities

Harms Inc. reported in its 2006 annual report the following information: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\underline{\text { Plan Status: December 31, } 2006}$ Accumulated Benefit Obligation (ABO) \ 90 million Projected Benefit Obligation (PBO) 95 million Plan Assets (at fair value) 80 million Unrecognized transition asset 11 million Unrecognized actuarial losses 1 million Assumptions: Discount rate 8\% Return on assets 9\% Compensation growth 5\% -If Harms had decreased its compensation growth rate to 4.5% in 2006, the effect would have been:

Pension risk arises to the extent to which plan assets have a different risk profile than the pension obligation.

If a company increases the amount of debt it has, all other things being equal, the risk to the shareholders increases.

Many of the postretirement health benefit plans offered by companies to their employees are unfunded, while all of their pension plans have some degree of funding. Which of the following statements is false?

The difference between the accumulated benefit obligation (ABO) and the projected benefit obligation (PBO) is:

Pawn Company's 2006 Annual Report included the following information about its defined benefit pension plan: $\quad$ $\quad$ $\quad$ $\quad$$\text { Plan Status: December 31, } 2006$ Accumulated benefit obligation \ 20 million Projected benefit obligation 25 million Plan assets (at fair value) 35 million Unrecognized transition asset 11 million Unrecognized actuarial losses 1 million Service cost 800,000 Interest cost 2,100,000 Actual return on plan assets (4,000,000) Assumptions: \ Discount rate 9\% Return on assets 10\% Compensation growth 6\% a. If Pawn had increased its discount rate to 10% in 2006 what would be the effect on the accumulated benefit obligation, the projected benefit obligation, service cost and interest cost? b. Estimate the interest cost for 2007 under the existing plan.

A decrease in the growth rate of the future compensation will cause an increase in pension cost.

An increase in the pension obligation because of passage of time is referred to as the interest cost.

Harms Inc. reported in its 2006 annual report the following information: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\underline{\text { Plan Status: December 31, } 2006}$ Accumulated Benefit Obligation (ABO) \ 90 million Projected Benefit Obligation (PBO) 95 million Plan Assets (at fair value) 80 million Unrecognized transition asset 11 million Unrecognized actuarial losses 1 million Assumptions: Discount rate 8\% Return on assets 9\% Compensation growth 5\% -The estimated interest cost for 2007 is:

Which of the following is not a component of pension expense?

Which one of the following statements is false?

Many postretirement benefits other than pensions are not funded, in part because they are not required to be funded by law, unlike pension plans.

Which of the following will give rise to off-balance sheet financing? I. Take-or-pay arrangements II. Sale of receivables without recourse III. Through-put agreements IV. Purchase commitments

Following is selected financial information for Universal Skyhook: Capitalized leases \ 4,100 Total assets 18,000 Total liabilities 10,000 Depreciation expense 1,000 Rent expense 2,000 Interest expense 1,000 Net income 1,200 Cash flow 2,000 Skyhook installed a new giant forging machine on January 1, 2006. It was financed as a five-year capitalized lease with year-end payments of $1,002 with an implied 8% interest rate. After the lease period, the scrap value will just about cover the cost to remove the machine. Skyhook had no tax expense in 2006 and uses straight-line depreciation for book and tax purposes. a. The company is examining financing alternatives for another machine and has received a synthetic lease proposal from a bank. To better understand this structure, the CEO asks you how the above 2006 numbers would have changed had Skyhook used a synthetic lease for the forging machine. b. How would you interpret your results and what would your recommendation be? c. Would your recommendation change if Skyhook had a tax rate of 36% and used accelerated depreciation for tax purposes?

Recording a long-term lease as an operating lease, as opposed to a capital lease, for a lessee will cause the following ratios to be: A. Higher Lower B. Higher Higher C. Lower Higher D. Lower Lower

Which of the following would not be found listed as a liability on a company's balance sheet?

Which of the following is reported in the equity section of the balance sheet?

For a company to report a contingent loss it should be either probable or reasonably estimable.

The par value of common stock represents the price at which a company offered its stock to investors when it made its initial public offering.

An analyst should treat preferred stock on a firm's balance sheet as debt when calculating leverage ratios if the preferred stock is convertible into common stock.