stereo warehouse is a us retailer that offers employees a defined benefit pension pl 1557365

Stereo Warehouse is a US retailer that offers employees a defined benefit pension plan and stock options as part of its compensation package. Stereo Warehouse prepares its financial statements in accordance with US GAAP. Peter Fried land, CFA, is an equity analyst concerned with earnings quality. He is particularly interested in whether the discretionary assumptions the company is making regarding

compensation plans are contributing to the recent earnings growth at Stereo Warehouse. He gathers information from the company’s regulatory fi lings regarding the pension plan assumptions in Exhibit 4 and the assumptions related to option valuation in Exhibit 5.

Compared to the assumptions Stereo Warehouse used to value stock options in 2008, earnings in 2009 were most favorably affected by the change in the:

A. expected life.

B. risk-free rate.

C. dividend yield.