AWMA Test Review 1 Complete Questions And
Answers 2024 Study Solutions
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 ANS 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 ANS 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 ANS 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 ANS 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 ANS 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 ANS 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.
,COLI is attractive to employers because it ANS 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. ANS 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 ANS 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. ANS 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 estate properties, but their income is higher than that of equity REITs. Mortgage
REITs do not provide inflation
protection.
Which one of the following is an advantage of equity REITs over mortgage REITs? ANS Equity REITs can
participate in the appreciation of the underlying properties.
Equity REITs own the underlying real estate properties, giving the owners an opportunity to participate in the net
cash flows from the operation of the properties and in any appreciation in the market price of the properties.
, ANS 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 ANS 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: ANS 1. market directional,
2. corporate restructuring,
3. convergence trading, and
4. opportunistic.
Equity (sector) long/short (market Directional) ANS 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) ANS 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) ANS 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.
Activist funds (market directional) ANS This is a corporate governance approach where the fund tends to have
highly concentrated positions (5 to 15 stocks, for example), and takes a very active role in working with the board of
directors and CEO of the company. The goal is to have influence in looking out for the shareholders' interests, and to
