AWMA Test Review 1 Questions & Answers 100%
Accurate!!
If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, what is its
taxable income?
A. $0
B. $25,000
C. $50,000
D. $100,000 - ANSWER-The net profits of a corporation are subject to federal income taxation. This
tax is levied on corporate taxable income before payment of dividends to common and preferred
shareholders. Thus, if ABC Corporation has net profits of $100,000 and distributes $50,000 as
dividends, its taxable income is still $100,000. Distribution of profits as dividends does not reduce
taxable income for a corporation
Qualified Plans - ANSWER-Meet the stringent requirements of the IRC as well as those of the ERISA
and therefore qualify for favorable tax treatment. In pension and profit sharing plans an employee is
generally not taxed on employer contributions or accumulated earnings until the funds are actually
received from the plan. The employer receives a deduction at the time of contribution. for qualified
stock option plans the employee is not taxed until it is sold.
Nonqualified plans - ANSWER-Do not qualify for special tax treatment. They don't permit the
employer to take a deduction for plan contributions until the employee reports income from the
plan, which is often at retirement. Earnings not tax deferred - earnings are taxed to the employer or
employee depending on the plans design
Nonqualified deferred comp plan - ANSWER-Do not qualify for the same special tax treatment. They
do not permit the employer to take a deduction for plan contributions until the employee reports
income from the plan, which is often at retirement. Also, the earnings on plan assets are not tax
deferred; instead, earnings are taxed to the sponsor(employer) or to the participant (employee),
depending on the plan design. The irs rules do permit an employee to agree to defer income to a
nonqualified plan and not be taxed on the deferral until some point in the future if the 3 rules are
followed.
Economic Benefit - ANSWER-A taxpayer has income when he receives the economic benefit of the
proceeds. This occurs when the employer irrevocably places funds for the benefit of the employee
,beyond the reach of the employers creditors. Income is thus received if the employee does not have
actual or even constructive receipt.(applies to funded plans)
Corporate owned life insurance - ANSWER-commonly used by employers to informally fund future
benefit obligations such as those promised under a deferred comp plan. As the owner of the policies
the employer is responsible for paying the premiums. The employer is also the beneficiary of the
policies and retains all rights to policy benefits, including the cash value buildup and the death
proceeds.
- ANSWER-The intent of Dodd-Frank was to "harmonize" and blend fiduciary rules that would pertain
to both broker-dealers and investment advisers. Investment advisers are held to a fiduciary standard
and broker-dealers to a suitability standard under the current rules
One of the most important financial goals of wealthy individuals is - ANSWER-The most-stated life
goals for wealthy individuals are having good health, travelling the world, and achieving financial
success. To achieve financial success, the most common financial goals are protecting wealth,
assuring retirement lifestyle, minimizing taxes, and leaving an estate to their heirs.
There are several kinds of strategies hedge funds use, and some approaches can be categorized. The
CAIA divides hedge funds into four main categories: - ANSWER-1. market directional,
2. corporate restructuring,
3. convergence trading, and
4. opportunistic.
Equity (sector) long/short (market Directional) - ANSWER-This is your classic hedge fund approach,
where the fund manager goes long a core group of stocks while also being short other stocks, and/or
futures or stock index options. At any given time the fund manager may be net long or net short. For
example, in bull markets, managers tend to be
net long, and in a bear market they may be net short. Sector long/short funds are just that—where a
fund manager specializes in a particular sector of the market, such as technology or health care. The
fund manager would go long stocks in the
category he or she believes will go up more in bull markets than the stocks he or she is short, and in
bear markets the expectation would be that the short stock positions would go down more than the
long stock positions.
Emerging markets (market Directional) - ANSWER-Investing in emerging markets primarily involves
long positions, and the inefficiencies in terms of market and company information in emerging
markets may give hedge fund managers an edge if they study and get to know the market.
, Specialized knowledge can be gained by having a presence in a country and becoming an expert on
various investment alternatives available
from that country. Emerging markets are more volatile than developed markets because they are less
developed and less liquid, but more risk can provide more opportunity.
Short-selling (market directional) - ANSWER-Short-selling hedge funds are on the opposite side of the
market of long-only funds, and obviously make money when the market goes down. Even though
these funds will be net short, they may also contain long positions. Market timing is often used, and
short positions will be increased in down markets and lightened up when the market is going
through a bull phase.
COLI is attractive to employers because it - ANSWER-1. Provides psychological assurance to deferred
comp plan participants that their benefit are secure.
2. reduces strain on the companys cash flow when plan distributions are due
3. provides tax-deferred, and possibly tax free buildup of cash value; and
4. enables the employer to recover some/all of the plan costs.
Changes that have occurred since investment firms changed from private partnerships to publicly
traded companies include all of the following except:
A. risk taking has increased.
B. profits can be privatized (bonuses) and losses socialized (bailouts).
C. there is greater individual accountability.
D. partners no longer share in both the profits and losses of the firm. - ANSWER-C. The repeal of
Glass-Steagall accelerated the conversion of investment firms that had been structured as
partnerships into publicly traded companies that took on more risk. This transferred much of the risk
and accountability from general partners to public shareholders
Equity REITS - ANSWER-Equity REITs own real estate properties and earn income from rents, and
made up 94.4% of the REIT market (by capitalization) at the end of 2015. Upon the sale of the
properties, a capital gain is earned. Generally, income from rents can be expected to increase each
year. Equity REITs are appropriate when one objective is to provide an inflation hedge
Mortgage REITs. - ANSWER-Mortgage REITs are similar to bond mutual funds, and make up
approximately 5.6% of the REIT market. No ownership interest in the underlying real estate property
exists. Instead, the fund invests in mortgages used by equity owners of the real estate properties to
finance their acquisition of the properties. Mortgage REITs may also invest in GNMA. pools or other
mortgage backed securities. They generally do not participate in capital gains on the sale of real
