Pension Case

You have been hired by a firm that plans to go public (sell equity to the market for
the first time).
The firm compensates its 45 year old CEO, Buster Bluth, with $400,000 of salary,
$350,000 of cash bonus, and $1,200,000 of equity (stock) compensation each
year. He is one of the most respected (and sought after) Chief Executive Officers
in the software industry.
The firm has a pension plan that offers Buster compensation at the end of every
year he is alive after he retires. The annual pension compensation formula is
(final year’s salary x 50%). The pension has no survivorship rights (it cannot be
transferred after him death to him dependents or spouse).
Employee’s rights to the pension vest after 10 consecutive years of full-time
employment with the company. Employees may retire at any point they choose
after the pension vests. Buster has worked for the firm for 7 consecutive years so
far.
You are being compensated at the newly hired accountant salary of $50,000 per
year. To entice you to join the firm, you have also been offered entrance into the
firm’s pension plan under the same exact formula and terms as stated above.
You must now compute the amount of cash this firm must put aside today to
cover its anticipated pension costs in the future.
Be sure to carefully document (and prepare to discuss) all assumptions you
make for this computation.

 

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