Bethlehem Case Study

Fin 521

Case Study 2 “Bethlehem”

1. The stakeholders in this U.S. corporate defined-benefit system were the corporations themselves. A defined benefit plan is a type of pension plan were the employer/sponsor, were obligated to pay benefits earner by a vested employee after the employee reached normal retirement age, whether the employee retired from the sponsor firm or left the firm before retirement due to job change or termination. The sponsor would regularly contribute funds to a legally separate pension trust so that the trust’s assets would equal or exceed the present value of the plan’s liabilities. This served as collateral for the firm’s pension liabilities to participants, however, gains and losses on these assets did not affect participants, since their benefits were defined. Investment performance did affect the sponsor, making them the stakeholders the firm that has the defined benefit plan.
   
2. The type of firms that offering a DB pension plan still make sense today would be large firms that are preferably in the finance, insurance and real estate, agriculture, mining, & construction, other transport & utilities industries. The firm needs to be large enough so that it can handle and adjusts to the risks associated with having the defined benefit plan. It also needs to be in an industry where the increased competition will not completely take over and bankrupt their existing firm.
   
3. Firms should allocate their defined benefit plan assets by putting about 50% into their equity, 30% into debt instruments, and the remaining 20% split between mutual funds, cash, insurance contracts, and miscellaneous assets. Regardless of the firm’s financial health, this should be desirable allocation of the pension assets with allowable adjustments based upon individual firm’s research, but should resemble a similar outlook.
   
4. There should be some sort of Pension Benefit Guaranty Corporation, so that firms can’t totally abandon individual retirement funds. However, I think that private insurance companies could do a better job of protecting these pensions than having the government guarantee the companies a safety net in case the companies don’t feel up to making the pension payments.
   
5. Using these assumptions, E=231, D=6179, V=6410, Rd=7.48%, Rf=6.03%, (rm-rf)=7.5%, B=1.35, Tc=.35, I determined that the weighted average cost of capital is 0.0527. From my assumptions and calculations, the theoretically appropriate discount rate for Bethlehem Steel would have been 5.27%.
   
   Rd was the US AA-rated bonds, Rf was 10-year US treasury, E was given, D was assumed from case study’s projected liabilities, Beta was given, equity premium was assumed from case study Exhibit 7, FASB “FAS 87”, and the corporate tax rate was given from the website https://www.irs.gov/pub/irs-soi/02corate.pdf.