Homework Sourse2 International Paper Companys 2013 annual report disclosed
| 2. International Paper Company’s 2013 annual report disclosed the following pension information: | |||||
| Year | Return | ||||
| 2013 | 14.10% | ||||
| 2012 | 14.10% | ||||
| 2011 | 2.50% | ||||
| 2010 | 15.10% | ||||
| 2009 | 10.08% | ||||
| 2008 | -23.60% | ||||
| 2007 | 9.60% | ||||
| 2006 | 14.90% | ||||
| 2005 | 11.70% | ||||
| 2004 | 14.10% | ||||
| The footnote also reports that International Paper’s expected long-term rate of return on plan assets is 8%. | |||||
| a. | Calculate the actual (long-term) rate of return over the past 10 years. | ||||
| b. | Does the company’s expected rate of return seem reasonable? Why or why not? |
| 2. International Paper Company’s 2013 annual report disclosed the following pension information: | |||||
| Year | Return | ||||
| 2013 | 14.10% | ||||
| 2012 | 14.10% | ||||
| 2011 | 2.50% | ||||
| 2010 | 15.10% | ||||
| 2009 | 10.08% | ||||
| 2008 | -23.60% | ||||
| 2007 | 9.60% | ||||
| 2006 | 14.90% | ||||
| 2005 | 11.70% | ||||
| 2004 | 14.10% | ||||
| The footnote also reports that International Paper’s expected long-term rate of return on plan assets is 8%. | |||||
| a. | Calculate the actual (long-term) rate of return over the past 10 years. | ||||
| b. | Does the company’s expected rate of return seem reasonable? Why or why not? |
Solution
a. Tha actual long-term rate of return is 8.33%.
Working:
b. The company\'s expected rate of returndoes not seem to be reasonable. This is because, although the long-term actual rate of return is 8.33% which is closer to the expected rate, the actual rate is higher than the expected rate for 8 of the 10 years, with 2008 and 2001 being exceptions, wherein the return was much lower .
It may be possible, that in these two years the conditions were not in control of the company. the average for the remaining eight years is 13.04%.
Therefore we may say that the expected rate of return needs an upward revision, so as to set a realisitc target.
| Year | Return |
| 2013 | 14.1 |
| 2012 | 14.1 |
| 2011 | 2.5 |
| 2010 | 15.1 |
| 2009 | 10.8 |
| 2008 | -23.6 |
| 2007 | 9.6 |
| 2006 | 14.9 |
| 2005 | 11.7 |
| 2004 | 14.1 |
| 83.3 | |
| Average | 8.33 |
