CFA Institute CFA-Level-II Exam - Topic 2 Question 74 Discussion

Actual exam question for CFA Institute's CFA-Level-II exam

Question #: 74
Topic #: 2

Lauren Jacobs, CFA, is an equity analyst for DF Investments. She is evaluating Iron Parts Inc. Iron Parts is a manufacturer of interior systems and components for automobiles. The company is the world's second largest original equipment auto parts supplier, with a market capitalization of $1.8 billion. Based on Iron Parts's low price-to-book value ratio of 0.9* and low price-to-sales ratio of 0.15x, Jacobs believes the stock could be an interesting investment. However, she wants to review the disclosures found in the company's financial footnotes. In particular, Jacobs is concerned about Iron Parts's defined benefit pension plan. The following information for 2007 and 2008 is provided.

Iron Parts has adopted SFAS No. 158, Employers' Accounting for Defined Benefit Pensions and Other Postretirement Plans.

Jacobs wants to fully understand the impact of changing pension assumptions on Iron Parts's balance sheet and income statement. In addition, she would like to compute Iron Parts's economic pension expense.

As of December 31, 2008, the funded status of Iron Parts's pension plan was:

A$175 million underfunded.

B$240 million underfunded.

C$ 183 million overfunded.

Show Suggested Answer

Suggested Answer: B

Funded status equals fair value of plan assets minus PBO (395 - 635 = -240). (Study Session 6, LOS 22.c,f)

by Nu at Mar 09, 2024, 10:45 PM

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Alysa

4 months ago

I agree, the pension liabilities could really impact their valuation.

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Veronika

4 months ago

Not sure about this one, pension plans can really mess up financials.

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Truman

4 months ago

$240 million underfunded? That's a huge red flag!

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Janet

5 months ago

I think the low price-to-book ratio is a good sign for investors.

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Alyce

5 months ago

Iron Parts is the second largest auto parts supplier, interesting!

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Alyce

5 months ago

I recall that underfunded pensions can be a red flag for investors. I think the funded status might be closer to option B, but I need to review the footnotes again to confirm.

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Vallie

5 months ago

I’m a bit confused about how to calculate the economic pension expense. Did we cover how SFAS No. 158 affects that? I feel like I need more clarity on this.

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Isreal

5 months ago

This question seems familiar; I think we had a practice problem on pension plans and their effects on financial statements. I’m leaning towards option A, but I’m not entirely sure.

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Florencia

6 months ago

I remember we discussed how pension assumptions can significantly impact the funded status. I think I need to double-check the calculations for the underfunding.

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Kenneth

6 months ago

I feel pretty confident about this question. Pension accounting is one of the topics I've really focused on studying, so I think I can handle this. I'll methodically work through the numbers and make sure I fully understand the impact of the different assumptions. Shouldn't be too much of a challenge.

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Arleen

6 months ago

Hmm, this is a lot of information to digest. I'm a bit confused about how to approach this. I guess I'll start by trying to understand the current funded status of the pension plan and then see how that changes under different assumptions. Hopefully I can piece it all together.

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Fausto

6 months ago

Okay, let's see here. The key things I need to focus on are the pension plan's funded status and how changes in assumptions like discount rate and expected return on plan assets can affect the numbers. I'll need to do some calculations to figure out the economic pension expense as well.

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Boris

6 months ago

This looks like a tricky pension accounting question. I'll need to carefully review the information provided on the pension plan and understand how the different assumptions can impact the balance sheet and income statement.

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Coral

6 months ago

Okay, I've got an idea on this. If there's no defined policy, then security measures will likely be all over the place, making it hard to implement things consistently. That's probably the biggest risk.

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Ines

6 months ago

I'm a bit lost on this one. The question is phrased in a way that I'm not sure I fully understand. I'll have to guess and hope for the best, but I'm not feeling too confident about this.

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Loren

6 months ago

I can't really remember if Arista switches use any of these directly; I just hope I guessed right!

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Ashley

6 months ago

I'm not too familiar with the meta http-equiv='refresh' tag, so I'll have to think about that option carefully.

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Merlyn

6 months ago

Hmm, I'm a bit unsure about this one. I think it might be Display styles, but I'll have to double-check that.

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Huey

2 years ago

I calculated the economic pension expense for Iron Parts and it seems like a risky investment.

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Lashaunda

2 years ago

I think it might actually be $240 million underfunded based on the information provided.

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Dewitt

2 years ago

I believe the funded status of Iron Parts's pension plan was $175 million underfunded.

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Huey

2 years ago

Yeah, I agree. It's important to fully understand the impact of changing pension assumptions.

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Dewitt

2 years ago

I think the question about Iron Parts Inc.'s pension plan is quite tricky.

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Amina

2 years ago

I agree with Emeline and B. The underfunded amount is likely $240 million based on the information provided.

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Bobbie

2 years ago

I disagree, I think the answer is A) $175 million underfunded. The numbers are quite concerning.

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Selma

2 years ago

I also believe it is B) $240 million underfunded. The pension plan seems to be in a bad shape.

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Emeline

2 years ago

I think the answer is B) $240 million underfunded.

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