Investment Planning - Module 3

LAC Corporation stock is currently trading for $180 per share. If the company institutes a 3-for-2 stock split, calculate the company's stock price following the stock split.

$120

Patrice Patterson began investing last year in the Apex Fund. She is investing $500 every quarter and wants to know what her average cost per share (basis) has been. These are the prices of the Apex fund at the end of each quarter when she made her purchases: $35.50, $38.90, $65.70, $72.50, and $89.00. What is her average cost per share?

$53.12

Dividend reinvestment plans offer which of these advantages?

A convenient means to accumulate shares

Acme Electric Company announces a cash dividend of $0.50 per share on August 5, to be paid on September 20, the payable date. The company also announces that the record date will be August 25. Bob Johnson purchases 100 shares of Acme on August 24. Based on this information, choose the CORRECT statement regarding the dividend payment.

Bob will not receive the dividend, because he did not purchase the shares before the ex-dividend date.

Identify which of these statements regarding rights and warrants is CORRECT. I. Rights provide current common stockholders with the ability to retain their ownership percentage when new shares of stock are issued. II. Warrants are typically attached to new bond issues to attract investors.

Both I and II

Rhett recently purchased a bond with attached warrants that afford him the opportunity to participate in the appreciation of the underlying stock. Which of the following statements correctly describes warrants? I. Warrants are customized to fit the needs of the issuing corporation. II. Warrants typically have a maturity date of several years.

Both I and II

Advantages of unit investment trusts include which of these? I. Stable periodic income II. Diversification III. Active management of the portfolio

I and II

Which of these statements are CORRECT of mutual fund dividend distributions? I. The fund pays dividends from net investment income. II. A single taxpayer may exclude $100 worth of dividend income from taxes annually. III. An investor is liable for taxes on distributions whether a dividend is a cash distribution or is reinvested in the fund. IV. An investor is not liable for taxes if he or she automatically reinvests distributions.

I and III

Identify the CORRECT statements regarding warrants. I. Warrants give the owner the right to purchase a specified number of shares for a specified period at a specified price. II. Warrants are typically written with a maturity date of nine months. III. Warrants must include standardized terms required by the Options Clearing Corporation. IV. Warrants are issued by a corporation rather than written by an individual.

I and IV

Identify which of these statements regarding unit investment trusts (UITs) is CORRECT. I. Units are sold at net asset value plus a commission for the broker executing the transaction. II. Like stocks, UITs are traded on the major exchanges. III. During the term of the trust, unit holders are taxed in the same manner as owners of variable annuities. IV. Upon maturity, the securities are generally liquidated and the proceeds distributed to the investor or trust beneficiaries.

I and IV

Which of the following are correctly defined bond classifications? I. Foreign bonds II. High-dividend-paying common stocks III. Commodities

I only

Which of these is a correct justification for use of an investment in a client's portfolio? I. Blue chip common stocks because they provide a hedge against inflation II. FNMA (Federal National Mortgage Association) securities because they are backed by the full faith and credit of the U.S. government III. Aggressive growth stocks because they perform better during economic contractions

I only

Equity income funds may hold which of these types of securities? I. Income-producing common stocks II. Convertible bonds III. Convertible preferred stocks

I, II, and III

Which of the following methods can be used in determining the basis in a mutual fund when the shares were acquired at different times? I. Specific identification II. First in, first out (FIFO) III. Average cost method

I, II, and III

Exchange-traded funds (ETFs) generally offer which of these? I. Tax efficiency II. Low expense ratios III. Professional management IV. Marketability

I, II, and IV

Which of the following regarding mutual fund performance is CORRECT? I. Past performance is a reliable predictor of future performance. II. Past performance offers some indication as to the competency of fund managers.

II only

Identify which of these methods may be used to trade exchange-traded funds (ETFs). I. Investors can buy or redeem shares from the fund family in lots of 1,000. II. Investors can trade ETFs in the secondary market by using a broker. III. ETFs can be purchased on margin. IV. ETFs may be sold short.

II, III, and IV

Which of these statements regarding unit investment trusts (UITs) are CORRECT? I. A bond UIT has a yield to maturity. II. UIT sponsors must make a secondary market in the UITs they create. III. UITs do not have management fees. IV. A bond UIT does not replace bonds that are called.

III and IV

Identify the entity that issues guaranteed investment contracts (GICs).

Insurance companies

Which one of these is NOT a typical key element that separates hedge funds from mutual funds? A) Many hedge funds are broadly diversified B) Leverage is often used in hedge funds C) Derivatives are used extensively by hedge funds D) Illiquid securities are often used in hedge funds

Many hedge funds are broadly diversified

Which one of these is a general characteristic of hedge funds?

May sell short a variety of securities beyond the standard stocks and bonds.

LFM Corporation declared a record date of Wednesday, May 16, for its next quarterly cash dividend. Determine the last day an investor can purchase LFM stock and receive the current dividend.

Monday, May 14

wo mutual funds have these performance statistics: Fund E Three-year total return 16.5% Standard deviation 18.1 R-squared 81% Sharpe ratio 0.58 Alpha 1.1 Fund F Three-year total return 17.2% Standard deviation 16.4 R-squared 87% Sharpe Ratio 0.68 Alpha 1.6 Which one of the two funds has the better risk-adjusted performance, and why?

The answer is Fund F, because its alpha is higher. In this case, the investor should choose the fund with the higher alpha. With an alpha of 1.6, Fund F exhibits the best risk-adjusted performance.

Which one of these statements is CORRECT regarding exchange-traded funds (ETFs)?

They also have lower turnover of assets than mutual funds and are, as a result, more tax efficient

To be on a corporation's books as holder-of-record (and thus have a right to the next dividend payment), the investor must purchase stock

before the ex-dividend date.

All of these statements correctly explain warrants except

issuing a bond with an attached warrant may permit the corporation to increase the coupon rate to entice investors to make the investment

When a company issues an option to buy its stock at a specified price within a specified time period, it is known as a

warrant.