Comment: I memorized that higher assumed volatility and higher risk-free rate results in higher compo expense; however, not sure how higher div yield lowers the value of stock options and thereby lowering comp expense & higher income.
An increase in the assumed discount rate typically results in a decrease in interest expense under GAAP.
Comment: Interest expense = plan assets * expected return rate; In questions like this one, is it assumed that the impact of a lower opening obligation dominate the impact of a higher i rate?
Higher dividend yield means the stock price will not increase as much. so option is not as valuable as it would be in case of lower dividend yield (when price increases more and option becomes valuable)
The return for owning the stock includes the dividends; the higher the dividend yield (all else equal), the lower the growth rate of the stock price. Because you don’t get the dividends when you own only the options, the value of your stock options is diminished.
(Note: just because three people on AnalystForum give the same answer to a question is not, in general, sufficient to establish that the answer is correct. In this case, however, it is.)
An increase in the assumed discount rate typically results in a decrease in interest expense under GAAP.
Comment: Interest expense = plan assets * expected return rate; In questions like this one, is it assumed that the impact of a lower opening obligation dominate the impact of a higher i rate?
I believe that interest expense = beginning _ liability _ × _ discount _ rate.
To see why the statement is true (at least for the early years), I’d suggest that you set up some numbers in Excel. Discount $1,000,000 for 20 years at 10% ($148,644), and for 20 years at 6% ($311,805), then calculate the annual interest expense (increasing the liability each year); the first year interest expenses will be:
$14,864 @ 10%
$18,708 @ 6%
After 8 years, the interest expense at 10% will finally be higher than that at 6%.