CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the effects that changes in the rate of compensation growth estimates will have on financial position of the firm?

I. An increase in the wage growth rate estimate will lower the present value of estimated plan assets in the future.
II. A decrease in the wage growth rate estimate will lower the service cost component of the firm's pension expense.
III. An increase in the wage growth rate estimate will deteriorate the funding status of the plan, holding everything else constant.
IV. A decrease in the wage growth rate estimate will ultimately increase the current reported earnings of the firm.
A. II, III and IV
B. I, III and IV
C. I, II and IV
Explanation: I is incorrect because an increase in the wage growth rate estimate will have absolutely no impact on plan assets. Instead, it will simply increase the firm's pension obligations.

IV is true because a decrease in the wage growth rate estimate will result in lower current pension expenses for the firm and thus ultimately increase its current reported earnings.

User Contributed Comments 1

User Comment
ThePessimist II is correct because the service cost represents the year's change in PBO, which will grow slower the lower the wage growth rate estimate.
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