Discount rate of DBO impact on CFO? interest, impact, discount, because

malbec

If you use a lower discount rate for your DBO, that means pension expense would be lower because interest cost based on a lower discount rate goes down. So the DBO will be lower (because interest cost is there too). Now when you calculate CFO, you add back any non cash charges to IN, right? Just like you add back depreciation to get CFO. Pension expense is also a non cash expense (it's based on estimates, etc, while your actual cash outflow is your contributions).

So, using a lower discount rate, would your CFO be higher, lower, or same?

zephyranalyst

I have to go back to see where I saw that question...but the idea is that with a lower discount rate, pension expense is higher. CFO, you add the pension expense (1-t) back and subtract employer's contribution (which is cash). So, CFO should be higher because you are adding back a higher pension expense than otherwise. In the problem I was doing, it seemed to ignore this logic (if this logic is correct).

ninja1024

pension expense should be higher when discount rate is lower. PV(...) would go UP when discount rate decreases.

Generally speaking, typically the Service cost of the pension expense is usually higher than the interest cost portion (unless it is a fairly mature plan where Interest expense part of the cost is significantly higher than the service cost).

impact on CFO - is not something that can be talked about in the absence of numbers to corroborate the condition.

CP

chaojimali

I would say same except the tax effect, as the expense will influance taxes, which could be different and CFO should be different due to taxes

but I am not sure about this

and I thought lower discount rate means usually higher interest cost



Edited 1 time(s). Last edit at Friday, May 28, 2010 at 05:31PM by pfcfaataf.