QUIZ - Impact of non-consideration of pension assets/liab in WACC

I have not seen this in Schweser. but there is something about PE multipliers and Impact of non-consideration of pension assets/liab in WACC. If you do not consider pension assets in WACC- You a) Overestimate PE multiplier? b) underestimate PE multiplier? c) there is no link of PE multiplier and (non)/consideration of pension liabilities? Which is the answer ? Also explain why ?

B) Underestimate Price??? My explanation: by not considering the pension assets, you overestimate the WACC, because of which you underestimate price. Lower price/Earnings as opposed to higher price by considering pension assets. That would be my half-baked answer.

B) Underestimate Price

you need to know if pension assets are riskier than firm assets

^ True, but at least in Schweser I think the guidance is that WACC is usually overestimated if you don’t include pension assets. So, I would assume WACC is overestimated unless we see something that contradicts that. I think B should be the right answer here.

Underestimate PE is the right choice. Right now I do not have the CFAI texts. I will type the relevant 3 sentences relating to this from CFAI text, tonight. you guys are doing great!

even without WACC, you can get to this the formulaic way, By not considering pension assets. Sales turnover ratio is higher --> RoE is higher (Dupont model) --> Higher Earnings (EPS) --> Lower P/E

The CFAI readings say that you are underestimating the P/E multiples of these companies, because the WACC goes into the denominator of the DCF calculation: so if WACC is overstated, then PE is understated. Also they say “generally” the WACC is overstated without accounting for the pensions. Meaning, I guess, it could be understated (maybe if the plan’s 100% allocated to a specific stock?? so, adding the pensions increases the overall net firm beta…)