Questions I've gotten wrong CFP
D
A CFP® professional is a Registered Investment Advisor, managing $120,000,000 in assets. One of the CFP® professional's clients sends a complaint letter to the CFP® professional, complaining that certain trades were not properly executed. During the investigation, it is discovered that the client never received the firm's Form ADV. Which governing body has ultimate authority over lack of regulatory disclosure for this matter (CFP® Certification Examination, released 8/2012)? FINRA CFP Board The firms' compliance department SEC
D
A cash basis taxpayer includes income from a service business when: The services are performed. The client is invoiced for the services. The client's check is deposited in the bank. The client's check is received by the taxpayer.
A (conversion ratio is par/conversion price)
A convertible bond has the following terms: Maturity value = $1,000 Time to maturity = 20 years Coupon rate = 8% Call penalty = One year's interest Exercise price = $10 per share. Given this information, you will inform your client as to how many shares of stock that the bond may be converted. 100 shares 80 shares 50 shares 20 shares
A (Covered compensation equals compensation under 330k for those that are covered under the plan. So Brent, Al and Rosie are covered and their compensation totals $585k-remember we have to limit Rosie's compensation to 330k. 25% of 585k is 146,250. Note that Brent or Rosie cannot receive more than 66k so the additional contribution would have to be relocated to other participants
INC sponsors a 25% money purchase pension plan for its eligible employees. Brent earns 195k, Al earns 60k, Rosie earns 335k, and Tom, who is ineligible, earns 27k. What is INC's required deductible contribution for the year? All employees are under age 50 A. 146,250 B. 147,500 C. 154,250 D. 265k
B (covered compensation limit is 330k. So 330 x 30 x .01. Note: If this was a top heavy plan the defined benefit plan contribution would have been times .02.)
A defined benefit pension plan has a funding formula equal to 1% times years of service times final salary. If George's final salary is $600k and he has earned 30 years of service, what is his retirement benefit? A. 66k B. 99k C. 265k D. 330k
C
A prospective client comes to you and he wants you to do some financial planning for him, but he is unwilling to disclose relevant information. What should you do? Refer the prospective client to another planner. Have the client sign a waiver. Ask the client for more information or terminate the engagement. Limit the scope of the engagement and work with the information provided.
A
A supplier of your company experiences fire damage at their plant. They cannot provide an essential part to you for a number of weeks. This, of course, delays your operation. You are covered by a very extensive insurance. For this reason, you would go to collect from your: Contingent business interruption. Extra expense insurance. Business interruption. Lease hold interest coverage.
B (In a marital trust, Maryanne must be the ONLY income beneficiary, and QTIP trusts are a marital trust.)
Allan wants to do estate planning with his spouse, Maryanne. Which of the following statements concerning their marital planning alternatives are accurate? Maryanne can be given a special power of appointment over the corpus of a testamentary bypass trust established by Allan's estate. In a marital trust established by Allan, Maryanne can be one of several income beneficiaries. The QTIP trust is equally viable as either a marital trust or a credit shelter trust. III only. I only. I and III only. I and II only.
B (the max annual addition to qualified plans is 66k. Its comprised of ER contributions, forfeitures, and employee deferrals. If the ER contributes $47,500 aka 190k x 25% to the plan and $4k in forfeitures, he can only defer $14,500 aka 66k-47,500,4k before reaching the 66k limit.)
Aidan, age 38, earns $190k per year. His employer sponsors a qualified profit sharing 401k and allocates all plan forfeitures to remaining participants. if in the current year, the ER makes a 25% contribution to all employees and allocates $4k of forfeitures to Aidan profit sharing plan, what is the max Aidan can defer to the 401k plan in 2023 A. 0 B. 14500 C. 22,500 D. 30k
B (The realized amount not only includes the monies and fair market value of property "B" received (and any indebtedness the buyer has to the seller), but also any liabilities for the seller is relieved. In this case, the seller received $675,000 in cash, property, and notes (buyers indebtedness to the seller) as well as relief from $50,000 in mortgage. The total amount realized is $725,000.)
Alice owns land "A" with an adjusted basis of $250,000, subject to a mortgage of $50,000. On July 1st, Alice exchanges land "A" and its mortgage for $300,000 in cash, a promissory note for $300,000, and property "B" that has a fair market value of $75,000 with Betty. What is the amount realized by Alice? $675,000 $725,000 $925,000 $975,000
D
Alisha Marie has just purchased a bond with a $1,000 par value that is callable in 7 years at $1,200. The bond matures in 20 years and has an 11.5% coupon, payable semi-annually. She purchased the bond at a discount at a price of $900. What is the yield to call on this bond? 7.79% 9.91% 13.77% 15.57%
A
An investor who searches for stocks selling at a low price to earnings (P/E) ratio believes that: Anomalies to the Efficient Market Hypothesis exist. The strong form of the Efficient Market Hypothesis is valid. Such stocks have low betas. The semi-strong form of the Efficient Market Hypothesis is valid.
B
As the fiduciary for a company defined benefit plan, you were recently approached by the employer, a sole proprietor. She requested a loan to the company from the assets of the pension plan to purchase equipment needed by the company. You respond that the loan request is: Acceptable if made to the employer as a participant in the plan. Acceptable if it bears a reasonable rate of interest in respect to current market rates. Acceptable since the money will be invested in the company and is NOT intended to directly benefit the employer. NOT acceptable, since the employer is considered a party-in-interest. II only. IV only. I and II only. I, II and III only.
B
As the personal representative for the Kazinski estate, your client must or may do the following: Defend the estate against creditor claims. Hold all income from the estate until all claims have been resolved. Favor a certain beneficiary over others. Enhance the value of the estate properties, if possible. IV only. I and IV only. II and III only. I, II and III only.
D (The time Avery spent at the condo does not count as personal days since he was there to "clean and perform maintenance." If he was there to relax then they would be personal days. The full $60,000 is allowed as a deduction from the income of $178,000 to equal $118,000 of income on the 1040.)
Avery owns a condo on the beach in California that he rents out each year. The rental income for the current year is $178,000 from the 206 days it was rented. Avery spent 30 days at the property during the year cleaning and performing maintenance activities. If rental expenses are $60,000, what is the net income reported on Avery's 1040 for the rental activity? $178,000 $144,137 $125,627 $118,000
D
Bonnie and Manuel are married. He paid $100,000 for their home five years ago. Its fair market value was $150,000 when Manuel died. What is Bonnie's basis in the home after Manuel's death if the home was held as community property and Manuel left his half to Bonnie? $50,000 $75,000 $125,000 $150,000
B (The $36.00 per share price is divided by the $3.00 earnings per share resulting in a price/earnings multiplier of 12. The increase of earnings by 25% results in a projected earnings of $3.75 next year. This new earnings times the P/E multiplier of 12 (assuming the P/E ratio remains constant) results in a price of $45.00. The dividend information provided is unnecessary in answering the question.)
Bristol-Buyers Company has a market price of $36.00 per share with earnings of $3.00 per share, a beta of 1.1 and a dividend of $1.20, which means a dividend payout ratio of 40%. Earnings for next year are projected to increase by 25%, and the retention ratio is projected to remain at 60%. Using the price/earnings multiplier, to what level might your client expect to see market prices move in a year? $39.60 $45.00 $50.40 $57.60
C (The question is looking for the maximum contribution for this employee. The wording is key, not "by the employee" or "on behalf of the employee". "For the employee" would consider both the employee and employer contribution. The maximum 401(k) plan employee contribution for an individual under age 50, is $22,500 (2023). The 12% money-purchase plan will add $16,800 ($140,000 × .12). Total contribution is $39,300; $22,500 from the employee and $16,800 from the employer.)
Calculate the maximum contribution that could be contributed for an employee, age 41, earning $140,000 annually, working in a company with the following retirement plans: a 401(k) with no employer match and a money-purchase pension plan with an employer contribution equal to 12% of salary. $16,800 $22,500 $39,300 $66,000
B (N=12 i=[(1.09/1.06)-1] × 100=2.83 PMT=24,900 × 1.06=26,394 FV=350,00)
Cathy and John Gonnerman would like to retire in twelve years. At that time, they would like to have accumulated $350,000 in today's dollars. To achieve this goal, they plan to invest a sum at the end of each year that will remain constant in purchasing power. They anticipate average inflation at 6% and have an after tax investment earning capacity of 9%. What payment is required at the end of the first year for them to reach their goal? $34,806.25 $26,394.63 $27,978.31 $50,104.88 $45,563.97
A (While all of these options may seem to accomplish Chad's goal, answer "A" has the most inherent risk. The trust options and titling option are much less likely to be susceptible to fraud and undue influence claims. The use of a will in this situation is very susceptible to a contest. The no-contest clause is irrelevant because Chad did not leave anything to anyone else to encourage them not to contest.)
Chad and Ross have been involved in an intimate relationship for the past 25 years. Chad's family is quite wealthy, and has provided Chad with every "extra" in life. Unfortunately, Chad's family does not approve of Chad's relationship with Ross. Chad was diagnosed with cancer last year and given only 12-15 months to live. Chad plans to leave the substantial wealth he has inherited over the years to Ross. After a few too many glasses of wine last Christmas, Chad's mother proclaimed, "Chad, I hope you have a great estate planning attorney and CFP® professional, because I will spend every penny I have to keep Ross from inheriting a dime from you!" In a fit of rage, Chad has come to you, an estate planning attorney, and asks you to recommend ways he can ensure that Ross will receive his assets. Which of the following would you be least likely to recommend to Chad to meet his objectives? A well-drafted will leaving everything to Ross with a no-contest clause. A revocable living trust created and funded now with Ross as the beneficiary at Chad's death. An irrevocable trust created and funded with Chad as the income beneficiary and Ross as the remainder beneficiary. Retitling all assets as JTWROS.
D (The grantor will pay the income tax on all distributions and the full value of the trust will be included in Charles' gross estate if he were to die before the end of the trust term.)
Charles Bronson placed blue-chip stocks valued at $200,000 into an irrevocable trust. The trust must pay 7% of the trust value to Charles each year for 10 years. After the 10-year period, the remainder is to be paid to his daughter, Lucy. Which of the following statements are correct: The trust will pay the income tax on earnings each year. If Charles dies before the trust term ends, the value in the trust less what he has already received will be included in his gross estate. I is correct only. II is correct only. Both are correct. Both are incorrect.
B (When you see lump sum needed to invest today you're looking for NPV. Begin mode; 30,000 CFj because that's how much he needs per year, 12 Nj because we need 12 years of the 30k; then use real rate of return so 1.07/1.05-1 x 100 for I/YR and solve for NPV)
Charles Cornwall needs an income stream equivalent to $30,000 in today's dollars at the beginning of each year for the next 12 years to maintain his standard of living. He assumes inflation will average 5% over the long run and that he can earn a 7% compound annual after tax return on investments. What lump sum does Charles need to invest today to fund his needs? $319,123.10 $325,202.39 $317,260.24 $323,605.44
C (First determine the standard deduction. The greater of $1,250 or earned income plus $400. Earned income of $500 plus $400 = $900, the standard deduction of $1,250 is greater. The calculation is as follows: Step 1 - unearned income. $1,500 (interest) - $1,250 (standard deduction) $250 taxed at the child's rate Step 2 - earned income $500 (wage) all taxed at the child's rate. The full standard deduction was already used. Total taxed at the child's rate is $250 + $500 = $750)
Dakota qualifies as a dependent of his parents. This year, he earned $500 from a part-time job and $1,500 in interest from a savings account. Dakota's taxable income for this year is: $2,000 $1,250 $750 $600
B (The use of David plus his kids are added together to determine David's use. He rents the property greater than 14 days so the property can't be personal. David's use is more than 10% of the rental days so it can't be rental. Therefore it is mixed use.
David has a vacation home that he rents for 200 days per year. He uses it for his own enjoyment for 15 days and the kids use it for 15 days per year. The property is considered A. Primary personal B. mixed use C. primary rental D. 1245 property
B (This is a present value of an annuity due problem. So, N = 20, I = 8, PV = ?, PMT = 250,000, FV = 0. Put your calculator in BEGIN mode and solve for PV. Inflation is not necessary in this calculation, lotto winnings income streams will not increase for inflation, they are the equivalent to a fixed annuity.)
David has won the Illinois state lottery. He must decide whether to receive annual payments of $250,000 at the beginning of each year for the next 20 years, or a lump sum payout. What lump sum amount does David need to receive to equal the $250,000 payments for the next 20 years, if he can earn an 8% return on his investments, assuming inflation is 3%? $2,454,537 $2,650,900 $2,875,900 $3,307,511
D (Diana's property will transfer to George because he survived her for at least eight months. Therefore, both answer "A" and answer "B" are incorrect. Answer "C" is incorrect because the property that transfers to George will not be eligible for the unlimited marital deduction in Diana's estate because the survivorship clause exceeds 6 months.)
Diana's will leaves all of her property to her husband, George. If he does not survive her by more than 240 days, the property will transfer to Diana's only daughter. Diana dies on May 1 and George dies on the following February 1. Of the following statements, which is true? Diana's property will transfer to her daughter and the property will be eligible for the unlimited marital deduction in Diana's estate. Diana's property will transfer to her daughter and the property will not be eligible for the unlimited marital deduction in Diana's estate. Diana's property will transfer to George and the property will be eligible for the unlimited marital deduction in Diana's estate. Diana's property will transfer to George and the property will not be eligible for the unlimited marital deduction in Diana's estate.
B (Daisy is an active participant. She cannot opt out of a defined benefit plan. Reduction = 6,500 × [(127,000-116,000) ÷ 20,000] Reduction = 3,575 $6,500 - $3,575 = $2,925 deductible contribution. Donald is not active in the current year so he is eligible for a spousal IRA of $6,500 Their total deductible contribution would be: $6,500 + $2,925= $9,425 Formula: Contribution × [(your AGI - the bottom of the phase out range) divided by the amount of the range (136,000-116,000 is where the 20k comes from)])
Donald and Daisy are married and file jointly. They are both age 42, both work, and their combined AGI is $127,000. This year Donald's profit sharing account earned over $5,000. Neither he nor the company made any contributions and there were no forfeitures. Daisy declined to participate in her company's defined benefit plan because she wants to contribute to and manage her own retirement money. (Her benefit at age 65 under the plan is $240 a month.) How much of their $13,000 IRA contribution can they deduct? Assume that $6,500 is contributed to each account. $6,500 $9,425 $10,075 $13,000
B (A is wrong bc the covered compensation limit is 330k so the max that can be contributed to Farley's act is 33k. C is wrong bc age based is not in Scott's best interest. Bc some of the employees are older than Scott the employees might be allocated a greater share of the contribution. D is wrong bc a new comparability plan is more expensive)
Farley is age 55 and opened a restaurant with a compensation of $350k. His son Scott is age 28 and makes $150k. Farley also employs 15 other employees whose ages range between 25 and 35 and have compensation on avg of 40k. Farley wants to establish a profit sharing plan. Which of the following is true A. If Farley chose the standard allocation method and the plan contributes 10% per individual, the plan will contribute 35k to Farley's acct B. If Farley selected the permitted disparity method and the plan contributes 10% per individual, the contribution the company makes for Farley will be increased C. Considering the needs and wants of Farley and Scott, an age based profit sharing plan is the best plan for both of them D. a new comparability plan is the least expensive, simplest way to meet both Farley and Scott's retirement needs
A (The loan is less than 100k and daughter has net investment income less than 1k interest is not imputed. If the borrower has net investment income less than or equal to 1k there's $0 of imputed interest)
Father loaned to daughter. Federal rate for this loan is 5.5%. Father has net investment income of $30k and daughter's is $900. The loan was for 50k. Father is charging daughter 2% interest for loan. Which is true A. Interest on the loan is not imputed B. interest on loan will be imputed 5.5% of the loan C. the interest loan will be imputed at 3.5% of the loan D. interest on the loan will be imputed at maximum of $900
D (When Jordan exercised the option, the bargain element was $2,000 [($10 Fair Market Value less $8 cost) x 1,000 shares]. The $2,000 will be reported as ordinary income by Jordan, and his employer will receive a $2,000 deduction. A is incorrect. Jordan was only required to report $2,000 of income. B is incorrect. Jordan's basis in the stock is $10,000 ($10 Fair Market Value x 1,000 shares). Therefore, his capital gain would be $5,000 ($15,000 sales price less $10,000 basis). C is incorrect. Alternative minimum tax does not apply to nonqualified stock options.)
Five years ago, Jordan was granted a nonqualified stock option giving him the right to purchase 1,000 shares of employer stock at $8 per share. He exercised the option three years ago, when the value of the stock was $10 per share. He sold the shares today at a price of $15 per share. Which of the following statements is correct regarding this series of events? Jordan reported $8,000 of ordinary income upon exercise. Jordan will have a capital gain of $7,000 as a result of selling the stock today. Jordan reported an alternative minimum tax adjustment of $2,000 when he exercised the options. Jordan's employer received an income tax deduction of $2,000 when Jordan exercised the option.
C
Gabby, a CFP® professional, is working with Debby, a retiree. Debby has a concentrated position in a highly appreciated growth stock, which makes up the majority of her assets. Debby requires income from her portfolio but is hesitant to sell her stock position. Which of the following strategies should Gabby recommend that would provide the least amount of risk to the retiree? Purchase put options on the stock. Sell covered puts on the stock position. Sell covered calls on the stock position. Sell the stock position and purchase an immediate annuity.
A
Generally, which of the following are noncontributory plans? 401(k) and money purchase pension plans . 401(k) and thrift plans. Thrift plans and ESOPs. Money purchase pension plans and profit sharing plans. IV only. I and II only. III and IV only. I, II, III and IV.
B (The inclusion of the difference between the fair market value and exercise price of the stock options will result in a credit that Giselle can use against future regular income tax liability. The other items are adjustments made to her itemized deductions, which result in permanent differences in tax liability as a result of the imposition of the AMT.)
Giselle became an AMT taxpayer last year. She had to add several items to her regular taxable income in arriving at alternative minimum taxable income. Which of the following items will result in an AMT credit that can be used to offset future regular tax liability? $5,000 in property taxes paid on her principal residence if paid in advance. A $75,000 difference between the fair market value of stock and the strike price in the incentive stock option used to purchase the stock. $4,000 in interest on private activity municipal bonds. $4,000 in additional medical expenses.
A
Hal is an investment counselor who is employed by Richardson Investments. While he attended a conference on the impact of the new tax laws in investment choices, he incurred the following unreimbursed expenses: Airfare = $350; Lodging = $450; Meals = $330; Tuition and fees = $410. Without regard to his AGI, how much can Hal deduct on his return? $0 $975 $1,150 $1,375
D (Total income minus total expenditures is net savings. Net savings divided by total income equals savings ratio.)
If your total income were $30,000 and the total of your expenditures including income taxes came to $26,000, your savings ratio would be: 86% 45% 33.3% 13.3%
D (The plan is a DC plan so the only vesting schedules allowed are Answers "A" and "D". The only graded vesting schedule is "D". Graded vesting encourages and rewards employee longevity. The graded vesting is probably better since all of his employees would already be 100% vested if they used the 3 year cliff.)
Jack Jones, age 40, earns $100,000 per year and wants to establish a defined contribution plan to encourage employees to stay with his firm. He employs four people whose combined salaries are $60,000 and who range in age from 23 to 30. The average period of employment is 3.5 years. Which vesting schedule is best suited for Jack's plan? 3-year cliff vesting. 3-7 year graded vesting. 5-year cliff vesting. 2-6 year graded vesting.
C (money purchase plan is a defined contribution plan so it benefits younger people, ER does not bear investment risk)
Jacob wants to start a qualified pension plan. He would like most of the plan's current contributions to be allocated to his account. He does not want to permit loans, nor does he want the company to bear investment risk of the plan's assets. Jacob is 47 and earns 300k per year. His employees' ages are 25,29, 32 and they each earn $25k per year. Which of the plans is best A. defined benefit pension plan B. cash balance pension plan C. money purchase pension plan D. defined benefit pension plan using permitted disparity
B
Jay owns an office building that burned down. The basis of the building was $125,000. The insurance policy paid Jay $195,000. What can Jay do that will defer the recognition of any gain? Jay must use the money to buy similar property. Jay must replace the property with similar property of equal or greater value within two years from December 31st of the year of realization. Jay must replace the property with any kind of business property within two years from the date of the fire. Jay must replace the property with similar property that costs at least as much as what the policy paid within 3 years of the fire.
C (Mary receives an adjustment in basis only on Joe's 1/2 ownership interest. Her basis in her half is a carryover $100,000 and she receives a new basis of $150,000 in Joe's share (total new basis is $250,000). So when she sells the property, she realizes $50,000 of gain ($300,000 - $250,000 = $50,000). Section 121 home sale gain exclusion only applies to a principal residence. This is a commercial property (apartment complex). If it applied to commercial property, they would flip for profit all the time and not pay tax.)
Joe and Mary are married and live in a common law state. They bought an apartment complex three years ago for $200,000. They titled the property JTWROS. Last year, Joe passed away. Mary immediately sells the apartments for $300,000. What if any is Mary's capital gain on the sale? $0 $25,000 $50,000 $100,000
A (N = 8 i = 8 PV = 10,000 (20,000/2) he only wants to pay half. PMT = 0 FV = ? Answer is 18,509.3021)
John Hendrick wants to pay one-half of the college costs for his daughter, Ruth. She will be attending a private college with annual costs of $20,000 today. Ruth is 10 years old and will be starting college in 8 years. If these costs are expected to increase annually by 8%, how much will Mr. Hendrick need to provide for her first year of college? $18,509 $23,409 $27,371 $37,019 $74,037
A (Section 179 deductions are limited to $2,890,000 of equipment placed into service. Placing the full 2.89 million would give you 1.16 million in deductions. Amounts over the 2.89 million will reduce the maximum deduction dollar for dollar. Kelly's Potato Chip manufacturing business' taxable income was $750,000. Kelly cannot deduct more than her taxable income. $2,940,000 - $2,890,000 = $50,000; $1,160,000 - $50,000 = $1,110,000 limited to the $750,000 of taxable business income.)
Kelly owns a potato chip manufacturing business. The demand for her gourmet potato chips is on the rise. This year her business had a record taxable income year of $750,000. Kelly has decided to invest in an upgraded potato slicing machine that will slice potatoes four times as fast as her previous machine. The cost of the new potato slicer is $2,940,000 and will be the only depreciable property that Kelly places into service during the current year. What is the amount of her Section 179 deduction for the current year? $750,000 $1,110,000 $1,160,000 $2,890,000
B (Start with figuring out the standard deduction. She can use her earned income plus $400 not to exceed 13,850 in 2023. Calculate Unearned Income first: 13,000 + 2,000 = 15,000 15,000 - 1,250 (standard deduction) = 13,750 remaining 13,750 - 1,250 (at the child's rate) = 12,500 remaining The remaining 12,500 will be taxed at the parent's rate. Then Calculate Earned Income: 14,000 - 12,600 (remaining standard deduction: 13,850 - 1,250 from the standard deduction used for unearned income) = $1,400 at the child's rate. Summary: Standard deduction is 1,250 + 12,600 = 13,850 At the parent's rate 12,500. At the child's rate (1,250 + 1,400) = 2,650.)
Kevin's 12 year old daughter, Angel, has a brokerage account that generates $13,000 of interest income and $2,000 of qualified dividends for the current year. Angel also has earned income of $14,000 from modeling that she is saving for college. How much will be taxed at Angel's tax rate? $1,250 $2,650 $12,500 $13,850
A (Their total amount of obligation is reasonable. Total debt should not exceed 36% of gross income of the client. Total debt is $1,625 + $300 = $1,925. Total $1,925 / (65,000/12) = 35.5%. As their total debt is less than 36%, it is considered a strength.)
Kim and Mark make $65,000 per year combined gross income. Their housing costs are $1,625 per month, while another $300 per month covers the balance of any other debt they currently owe. Other household expenses bring their total expenses to $3,200 per month. The total portion of their obligations that are monthly interest payments (included in the mortgage and other debt amounts) is $1,000. Their take home averages $3,500 per month. Over the last several years, they have managed to save 3% to 5% of their income. They have set aside $22,400 in money market funds. Select "A" if their total debt can be considered a strength. Select "B" if their total debt can be considered a weakness. Their total debt can be considered a strength. Their total debt can be considered a weakness.
C (The 17 year old does not qualify since the cut off for children is under age 17 (not including 17). Therefore Lucy will get $2,000 credit for each of her 3 children = $6,000.)
Lucy, a single mother, has four children, ages 4, 8, 12, and 17. How much will her child tax credit be for the current tax year assuming her AGI is $150,000? $2,000 $4,200 $6,000 $8,000
D
Martina Flower, CFP® is dually registered under the Investment Advisers Act of 1940. For which one of the following activities would this planner be in violation of the act? She received, with the client's knowledge, both a fee for advice given to the client and a commission from the client transactions. She included the cost of preparing the client's income tax returns as part of the annual fee charged the client. She gave clients planning advice that was NOT achievable, given the current economic conditions. She distributed to clients the written disclosure brochure two weeks after an investment advising contract was duly signed
D (Cash balance plan. Answers "A" and "C" are incorrect since they are not defined benefit plans. Answer "B" - Money purchase plan is a "pension plan" but it does not provide employees with a defined benefit, only a defined contribution. Answer "D" - Cash balance plan provides a defined benefit (returns are guaranteed by the employer) and the employee receives an "account" to see how much they have.)
Match the following statement with the type of retirement plan that it most completely describes: " A defined benefit plan that has the appearance of a defined contribution plan" is a... Profit sharing plan. Money purchase plan. SIMPLE IRA. Cash balance plan.
B (Defined benefit plan and cash balance plan (Answer "D") contributions are determined by age, as well as salary. Answer "A" doesn't require annual contributions. Answer "C" has employer contributions determined by the amount of employee deferrals.)
Match the following statement with the type of retirement plan which it most completely describes: "A plan which requires annual employer contributions equal to a formula determined by each participant's salary" is a... Profit sharing plan. Money purchase plan. SIMPLE IRA. Defined benefit plan.
B (A qualified matching contribution would only be made to those employees that actually deferred into the 401(k) plan. Therefore, she would not have received a contribution since she did not defer. Therefore, she is not an active participant. If the problem had said that she received a qualified nonelective contribution then the contributions would have been made to all employees and therefore, she would have received a contribution and would have been an active participant. She can contribute and deduct her contribution to a Traditional IRA since she is not an active participant and therefore not subject to an AGI limitation. She is unable to contribute to a Roth IRA because she is above the AGI limitation of $138,000 - $153,000 (2023). Because she is 50 or older she is allowed to make the $1,000 (2023) catch up contribution.)
Meg has AGI of $1,000,000 (which is all comprised of earned income). She is single and age 50. Her employer offers a 401(k) plan and, although she is eligible to defer, she does not make any deferrals into the plan. The employer made a Qualified Matching Contribution during the current year in order to meet the ADP test. Which of the following statements is true? She can contribute $6,500 to Traditional IRA and deduct all $6,500. She can contribute $7,500 to Traditional IRA and deduct all $7,500. She can contribute $6,500 to Traditional IRA and deduct $0. She can contribute $7,500 to Traditional IRA and deduct $0.
A (N=4, PV= -1, FV= 1.12x.95x1.08x1.18, solve for I for geometric mean)
Michael has an investment with the following annual returns for four years: Year 1: 12% Year 2: -5% Year 3: 8% Year 4: 18% What is the Arithmetic Mean (AM) and what is the Geometric Mean (GM)? AM = 8.25%, GM = 7.91% AM = 8.25%, GM = 10.64% AM = 10.75%, GM = 7.91% AM = 10.75%, GM = 10.64%
D (Mike is considered an active participant because a forfeiture allocation was made to the plan on his behalf. Therefore, he can contribute to a Traditional IRA but will be unable to deduct because he is above the AGI limitation for a MFJ active participant ($116,000 - $136,000) (2023). He could contribute to a Roth IRA because he is below the AGI limitation of $218,000 - $228,000 (2023). Incidentally, because he is 50 or older he is allowed to make the $1,000 (2023) catch up contribution. Lola is not an active participant because she is not covered by any plan. Although she doesn't have any earned income she can utilize her husband's earned income. Since she is not an active participant but her husband is, she will utilize the spousal phase out limitation of $218,000 - $228,000 (2023). Since their AGI is below this amount she can make a deductible contribution to a Traditional IRA. Alternatively, she could con
Mike and Lola are both 60 years old. They are married filing joint and have AGI of $150,000 (which is all comprised of earned income). Mike's employer offers a 401(k) plan and although he is eligible to defer he does not make any deferrals into the plan. The employer allocates forfeitures to plan participants. This year, $5 of forfeitures were allocated to Mike's account. Lola does not work outside the home and does not have any earned income. Which of the following is true? They can both make deductible contributions to a Traditional IRA. Neither of them can make deductible contributions to a Traditional IRA but they can both make a Roth IRA contribution. Mike can make a contribution to a Roth IRA but Lola can't. Lola can make a deductible contribution to a Traditional IRA but Mike cannot.
B (Solution: The correct answer is B. Answer b is correct because his benefits under the defined benefit plan must be preserved. Answer a is not correct as "wearaway" was done away with as it negatively effected employees who were near retirement and resulting in employees not accruing additional benefits after a conversion from a defined benefit plan to a cash balance plan. Answer c is not correct as the PBGC does not fully guarantee benefits. Answer d is not correct as a cash balance plan will have a guaranteed rate of return. Employees do not self-direct their assets in a cash balance plan.)
Mike's Mega Muffelettas (MMM) is a fairly large company based in Louisiana, with over 300 employees. MMM sponsors a defined benefit plan. George has worked at the company for the last 30 years and is looking forward to his retirement in another ten years. However, he just received a letter from the company that informs him that his defined benefit plan is being converted to a cash balance plan. What advice can you give George? His benefit could freeze as a result of the conversion; a situation known as "wearaway." The present value of the accrued benefit from the defined benefit should be preserved in the conversion and you should earn additional benefits under the cash balance plan. The cash balance plan provides a guaranteed rate of return and benefits that are fully insured by the PBGC. The cash balance plan acts like a defined contribution plan and will permit George to self-direct his retirement assets.
B
Mike's Mega Muffelettas (MMM) is a fairly large company based in Louisiana, with over 300 employees. MMM sponsors a defined benefit plan. George has worked at the company for the last 30 years and is looking forward to his retirement in another ten years. However, he just received a letter from the company that informs him that his defined benefit plan is being converted to a cash balance plan. What advice can you give George? His benefit could freeze as a result of the conversion; a situation known as "wearaway." The present value of the accrued benefit from the defined benefit should be preserved in the conversion and you should earn additional benefits under the cash balance plan. The cash balance plan provides a guaranteed rate of return and benefits that are fully insured by the PBGC. The cash balance plan acts like a defined contribution plan and will permit George to self-direct his retirement assets.
A (The $2,200 is earned income. Earned income is not subject to kiddie-tax. His standard deduction is the greater of $1,250 or his earned income plus $400, not to exceed $13,850 in 2023. Therefore his standard deduction is $2,600, which eliminates his income so he owes no tax.)
Mrs. Eagleton is in the 35% tax bracket and her child just started stocking shelves at the local grocery store on the weekend. His total earnings from the grocery store are $2,200 for the taxable year. What is the amount of tax owed on the son's income? None $95.00 $332.50 $770.00
C (Loan/margin amount $100 × 50% = $50 (initial share price × initial margin %) Actual equity: $50 − $50 = 0 (current price − loan amount) Required equity: $50 × .25 = 12.50 per share (current price × maintenance) To meet required equity: $12.50 per share × 200 shares = $2,500. There is no equity in the account, so the full $2,500 must be deposited.)
My margin requirements are 50% initial margin and 25% maintenance margin. I purchase a total of 200 shares at $100 per share using full margin amount for the 200 share purchase. Shortly thereafter, share prices fall to $50 per share. What will my margin call be? A.$1,000 B.$1,500 C.$2,500 D.$5,000
A
MyLei, who is a sole proprietor, is going to give her best customers gifts as a token of her appreciation. If MyLei wants to deduct the full cost of the gifts, what is the maximum amount she may spend on each customer's gift? $25 $50 $100 $250
D (All of Nina's medical expenses are deductible medical expenses. Her total deductible medical expenses are $6,000. However, her actual deduction is limited to the amount of deductible medical expenses that exceed 7.5% of her AGI or $1,500. Therefore, her deduction for medical expenses is $4,500 ($6,000 - $1,500).)
Nina has been very ill this year and has a significant amount of medical expenses, as listed below. $1,200 in prescription drug costs. $2,000 in doctor's bills not reimbursed by Nina's insurance. $800 in travel expenses to see a specialist in another state (these expense fall within the IRS guidelines). $2,000 out of pocket for health insurance premiums. Nina's AGI is $20,000. What is the amount of her deduction for medical expenses? $1,500 $2,000 $4,000 $4,500
C (To calculate the growth: N=1×2 i=15/2 PV=<100,000> PMT=0 FV=? Answer is 115,562.50. The account made 15,562.50 on a $100,000 investment. Divide the amount made 15,562 by the amount invested ($100,000) to arrive at the effective rate 15.56%.)
Norman Peterson earned 15 percent on the $100,000 he invested in a special account at his credit union last year. Interest was paid semi-annually. His effective rate of interest was: 15.00% 15.31% 15.56% 15.75%
C
Of the following statements, which is false? The unlimited marital deduction merely postpones the potential estate tax due. Property that is not included in the decedent's gross estate cannot qualify for the unlimited marital deduction. The death benefit of a life insurance policy included in a decedent's gross estate is not eligible for the unlimited marital deduction. An individual can use the unlimited marital deduction during life to fund the surviving spouse's applicable estate tax credit. The best property to transfer is the property that is expected to appreciate in value.
C
One of the disadvantages of an ESOP is that the stock is in an undiversified investment portfolio. Which of the following statements is correct about ESOPs? An employee, age 55 or older, who has completed 10 years of participation in an ESOP may require that 25 percent of the account balance be diversified. An employee who receives corporate stock as a distribution from an ESOP may enjoy net unrealized appreciation treatment at the time of distribution. I only. II only. I and II. Neither I or II.
C (wage base is 160,200. So 160,200 x the 6.2% OASDI is $9,932.4 the EE and ER will each have to pay that amount. The medicare tax is 1.45% so 1.45% x 180k is $2610 and the EE and ER will each have to pay that amount)
Paul earns $180k in salary this year. What is the total FICA tax for 2023 A. 9,932.40 B. 12,542.00 C. 25,084.80 D. 27,540
D (PDC is the owner and beneficiary of the policy. For the same reason, premiums are NOT considered a gift or taxable to Digger, nor will they appear in his gross estate. "Key person" life premiums are not deductible as a business expense. Any death benefit paid will be nontaxable to PDC.)
Prairie Dog Corporation (PDC), an oil drilling company, has a "key-person" variable universal life policy on Digger Phelps, its vice-president of drilling operations. The owner and beneficiary of the policy are the corporation. Which of the following is correct? Premiums paid by PDC are taxable income to Digger. Premiums paid by PDC are considered gifts to Digger. Premiums paid by PDC are tax deductible as a business expenses. Any death benefit paid will be nontaxable to PDC.
D (Read the facts carefully. Big Mike already used his lifetime exclusion (this one exclusion for gifts, estate and GSTT). He also already gifted the annual exclusion amount. This is a fully taxable gift for both gift tax and GSTT. The GST tax of $400,000 is added to the gift for the determination of the gift tax. Thus, $1,400,000 × 0.40=$560,000.)
Presuming Big Mike has used his entire lifetime generation skipping transfer tax exemption and this year he gives his granddaughter Jordan, age 16, $1 million dollars in cash after giving her $17,000 (equal to the annual exclusion) on her birthday. Big Mike has the permission of both of Jordan's parents to make the gift. How much is the gift tax on this gift? (The GST rate is 40%). There is no GST tax or gift tax. There is no gift tax but there is $400,000 of GST. $400,000 gift tax. $560,000.
C
Rank the following investments in order of expected volatility, from least volatile to most volatile: Bankers acceptances Treasury bills Commercial paper Treasury notes Agency issues A.Treasury bills, Treasury notes, Commercial paper, Bankers acceptances, Agency issues. B.Treasury notes, Treasury bills, Commercial Paper, Agency Issues, Bankers acceptances. C.Treasury bills, Commercial Paper, Bankers acceptances, Treasury notes, Agency issues. D.Agency issues, Treasury bills, Treasury notes, Bankers acceptances, Commercial paper.
A For tax purposes, bargain sale transactions (selling to an unrelated party at a price well below FMV) cannot generate capital losses.)
Reagan purchased stock in XYZ Corporation three years ago for $110,000. Today it is worth $100,000. Reagan exchanges (sells) the stock to a local charity for $10,000. What is Reagan's capital loss on the transaction? $0 $10,000 $100,000 $3,000
C (The compensation limit of $330,000 applies to SIMPLE IRAs when non-elective contributions are made. Therefore the employer contribution is $6,600 (330,000 x 2%) and the employee can contribute up to $15,500 for 2023. In addition, Robert is 50 years old or older so he may make an additional catch-up contribution of $3,500. His total contribution is $6,600 + $15,500 + $3,500 = $25,600.)
Robert Sullivan, age 56, works for Dynex Corporation, and earns $360,000. Dynex Corp. provides a non-elective 2% contribution to its SIMPLE IRA plan. Which one of the following is the maximum amount that could go into Robert's account this year? $15,500 $19,000 $25,600 $26,200
C
Ron asks a CFP® professional, Tara, to help him analyze his disability insurance need. Ron is age 35 and in good health. Which of the following represents the least important information for Tara to obtain to assist Ron with the analysis? Ron's existing disability coverage. Ron's existing emergency fund. Ron's existing medical insurance coverage. Ron's current income level.
D (Sam does not mention how he wants the money. He may want it either in terms of capital utilization (like an annuity) or capital conservation where the principle is never touched (only interest is used). Since the facts don't state Sam's age, years until retirement, or expected mortality, the capital conservation model makes sense here. With the information provided you can back into the number by figuring 24,000 income based on 8% of your answer set. This would be the capital conservation model. Or an easy step would be 24,000 / .08 = 300,000.(
Sam Peterson wants an additional $24,000 per year income after his retirement. Sam can earn 8% interest. How much will he need to invest to reach his goal? $192,800 $240,000 $277,835 $300,000
B (She can contribute to a Traditional IRA since she has earned income. She is considered an active participant because her employer made a contribution to the SEP on her behalf. Her deduction will be limited because she is within the AGI limitation for a single active participant ($73,000 - $83,000) (2023). She is also entitled to the catch up contribution of $1,000 because she is 50 or older. Therefore, her deductible contribution is: 7,500 × ((74,000 - 73,000)/10,000) = $750 is not allowed so $7,500 - $750 = $6,750 is permitted. Although the question didn't ask - alternatively, she could contribute to a Roth IRA because she is below the AGI limitation of $138,000 - $153,000 (2023).)
Satish has AGI of $74,000 (which is all comprised of earned income). She is single and age 51. Her employer made a $6,300 contribution to her SEP for the current year. What is her available deduction allowed for a Traditional IRA contribution? $750 $6,750 $6,850 $7,500
D
The index of leading economic indicators is used to forecast: Potential future inflation. Future changes in security prices. Consumer behavior. Economic expansions and contractions.
D
The maximum retirement benefit a participant in a target-benefit plan will actually receive depends on the: Initial actuarial computation according to the plan's formula. Amount of contributions determined in reference to the targeted benefit. Maximum annual additional amounts. Value of the participant's account at retirement.
B
The primary function of the Federal Reserve System (central bank) is to: Implement fiscal policy. Carry out monetary policy. Issue bonds to the general public. Manage the revenues and expenditures of the federal government.
D
This estate planning tool is created and managed by a qualified charity to provide a variable income stream (based on portfolio performance) to non-charitable beneficiaries. A charitable remainder unitrust. A charitable lead trust. A charitable annuity. A charitable pooled income fund.
D
Use of an Irrevocable Life Insurance Trust can accomplish which of the following? Create a vehicle to avoid Generation Skipping Transfer Tax. Make proceeds available to the surviving spouse. Ensure that proceeds will be excluded from the probate of both spouses. Shelters cash contributed for premiums from gift taxation up to the annual exclusion amount. I and II only. II, III and IV only. I, II and III only. I, II, III and IV.
C
With regard to Sections 1245 and 1250, Section 1231 will be applied only when: Any depreciable tangible personal property is sold at a profit. Any depreciable tangible personal property is sold at a profit above its adjusted (depreciated) basis. Any depreciable property is sold at a profit above its original cost. Any depreciable property subject to MACRS rules is sold at a profit.
A
What is one implication of the efficient market hypothesis? Consistently superior performance is rare. The weak form suggests that security prices do NOT adjust to new information. The random walk hypothesis is invalidated. Anomalies are perceptions but do NOT actually exist.
A
What is the primary advantage of using the Section 179 Deduction over other cost recovery methods? By deducting more currently, total tax liability is reduced and the present value of cash flows is increased. The $1,160,000 Section 179 limit allows a businesses to deduct more up front. Section 179 reduces the depreciation on most assets to only three years. Depreciation applies only to business assets, whereas Section 179 applies to business and personal assets.
B (The amount carried divided by the amount required (80% of current value) times the loss, minus the deductible equals the payment. One of the tricks on this one is that he purchased $80,000 of coverage initially (80% of the purchase price). So, the covered loss equals [$80,000 / (.80 × $160,000)] × $10,000 = $6,250. The insurer will pay $6,250 - $500 = $5,750.)
When Pete Morin purchased his $100,000 home, he insured it at the required coinsurance amount of 80% of the value. Over the last five years, the value of his home has increased and is now $160,000, but he has not increased his coverage. Pete has a $500 deductible. He has a kitchen fire causing $10,000 in damage. What amount will his insurer pay for repairs? $4,250 $5,750 $6,250 $9,500
B
When should you provide your client with Form ADV? After entering into an agreement to provide financial planning. As part of the financial planning engagement disclosures. Prior to purchasing any securities as part of the plan implementation. As part of the data gathering process.
D (Property transferred by way of the marital deduction above the decedent's unified credit will be fully taxed upon the surviving spouse's death. A QDOT is used where the surviving spouse is not a U.S. citizen.)
Which combination of the following statements about the marital deduction is true? The marital deduction has the effect of treating the husband and wife as one economic unit for gift and estate taxes. Property that qualifies for the marital deduction in excess of decedent's unified credit is excluded from the surviving spouse's gross estate. Qualifying all of the decedent's property for the marital deduction may result in excess estate tax being paid. A qualified domestic trust is used to provide for the spouse when there has been a second marriage. I, II and III only. II and IV only. I, III and IV only. I and III only.
B (Lucy and Helen are HC due to compensation being greater than $150k. Drew is HC bc he owns more than 5% of the business. Cam is not HC bc she does not have compensation greater than $150k.)
Which is considered highly compensated 1. Lucy, a 1% owner whose salary last year was $158k 2. Drew, a 6% owner whose salary was $48k last year 3. Cam, an officer, who earned $89k last year and is the 29th highest paid employee of 96 EE 4. Helen, who earned $155k last year and is in the top 20% of paid EE A. 1 and 4 B. 1,2,4 C. 1,3,4 D. all
A (II is incorrect. If a death benefit is paid to a survivor upon the death of an employee, the death benefit is taxable to the employee (and deductible by the employer). Note: this option does not indicate that life insurance is being used. If life insurance was used, it would still be an incorrect answer because it would not be deductible by the employer AND tax-free to the recipient. III is incorrect. Non-qualified deferred compensation is not taxed to the employee currently but is also NOT deductible by the employer currently.(
Which of the following benefits, paid for by an employer, would be both deductible by the employer and not taxable to the employee? Group term life insurance of $25,000. Death benefit of $10,000. Non-qualified deferred compensation. Pension plan. I and IV. II and III. I, II, and IV. I, III, and IV.
D (A grantor trust can own stock in an S Corporation. The number of shareholders of an S corporation is limited to 100 and the S corporation can only have one class of stock. LLCs, partnerships, and other corporations are prohibited from becoming S corporation shareholders. Additionally, nonresident aliens and most trusts may not be S corporation shareholders.)
Which of the following can own stock in an S corporation? Non-resident alien. Publicly-traded corporation. Partnership Grantor retained annuity trust.
B (All of the above have the potential to increase the money supply; however, the Federal Reserve does not control the expenditures of the federal government. Increasing expenditures of the federal government would be fiscal policy, not monetary policy.)
Which of the following can the Federal Reserve do to increase the money supply? Decrease the reserve requirements for banks from 8% to 6%. Increase expenditures of the federal government, thereby increasing the money supply in the economy. Conduct open-market transactions. I only. I and III only. II only. I and II only.
A (This is because 1/2 of the asset is removed from the gross estate of decedent due to the deemed contribution rule. Answer "B" is incorrect because a testamentary trust is created at death. Answer "C" is incorrect because it is an incomplete gift until the grantor survives the trust term. Answer "D" is incorrect because if a client owns his own life insurance the proceeds are included in his gross estate. You will find questions like this on the exam, you can get down to two reasonable choices but one will have a slight advantage. In this case the re-titling of property is an immediate reduction in gross estate. The ILIT would not be for 3 years.)
Which of the following is a way to transfer assets out of the gross estate during a client's lifetime? The creation of a joint tenancy with right of survivorship with the creator's spouse. A Testamentary Trust. A Grantor Retained Interest Trust with children as beneficiaries. A Client-owned life insurance policy recently transferred to an ILIT.
D (The Section 2503(b) is a simple trust. A complex trust is a non-grantor trust which in a given year accumulates fiduciary income or distributes trust corpus, whereas a simple trust distributes no corpus. A 2503(c) trust allows for accumulation.)
Which of the following is considered a complex trust? A 2503(c) trust. A trust which allows the trustee discretion to distribute or accumulate current income. A trust which allows a beneficiary a limited noncumulative right to demand. A Section 2503(b) mandatory income trust that has only individual beneficiaries. I and IV only. I, III and IV only. II and IV only. I, II and III only.
B
Which of the following is not a requirement that must be satisfied in order for a legally married taxpayer to use the head of household filing status? The taxpayer must file a separate tax return from the spouse. The taxpayer must furnish over one-half of the cost of maintaining the household. The spouse must not be a member of the household during the last six months of the tax year. The taxpayer must be legally separated from the spouse. II only. IV only. III and IV only. I, II and III only.
C (Answer "A" is incorrect because a taxable gift occurs when the GRAT is established, not when the GRAT term ends. Answer "B" is incorrect because if the grantor dies during the trust term, all of the trust assets are included in his gross estate. Answer "D" is incorrect because if the grantor survives the trust term, none of the trust assets are included in his estate.)
Which of the following is true regarding a Grantor Retained Annuity Trust (GRAT)? At the end of the GRAT term, a taxable gift occurs. If the grantor dies during the trust term, a pro rata portion of the trust assets are included in the grantor's estate. Interest and dividends earned by assets in a GRAT are taxed to the grantor. If the grantor survives the trust term, all of the trust assets will be included in the grantor's estate.
B (Churches are not qualifying sponsors of 457 plans.)
Which of the following statements are true in regards to Section 457 plans? Eligible plan sponsors include non-profit organizations, churches, and governmental entities. In-service distributions after age 59 1/2 are allowed in a 457 plan. Salary deferrals are subject to Social Security, Medicare, and Federal unemployment tax in the year of the deferral. Assets of the plans for non-government entities are subject to the claims of the sponsor's general creditors. I and III only. II, III and IV only. I, II and IV only. III and IV only.
D (Cash balance plans are defined benefit plans due to the guaranteed investment returns and benefit formula, not simply a contribution amount. While cash balance plans provide guaranteed rates of return, they are not 100% guaranteed by the PBGC (PBGC has coverage limits). Cash balance plans use 3-year cliff vesting only. Choice d is correct.)
Which of the following statements concerning cash balance pension plans is correct? The cash balance plan is a defined benefit plan because the annual contribution is defined by the plan as a percentage of employee compensation. The cash balance plan provides a guaranteed annual investment return to participant's account balances that can be fixed or variable and is 100% guaranteed by the Pension Benefit Guarantee Corporation. The cash balance plan uses the same vesting schedules as traditional defined benefit plans. The adoption of a cash balance plan is generally motivated by two factors: selecting a benefit design that employees can more easily understand than a traditional defined benefit plan, and as a plan that has more predictable costs associated with its funding.
A (The value of the CRAT is included in the gross estate and then deducted from the adjusted gross estate as a charitable deduction. Only gift taxes paid on gifts made within three years are included under the gross up rule.)
Which of the following statements is/are correct? The value of a CRAT where the decedent was the only non-charitable beneficiary is included in the gross estate of the decedent. Gift taxes paid two years prior to the death of the decedent for gifts made four years ago are included in the gross estate of the decedent under the gross up rule. I only. II only. Both I and II. None of the choices.
D (The duties explained in Statements "I" and "II" are responsibilities of the plan administrator.)
Which of the following tasks are the primary responsibilities of a plan trustee? Determining which employees are eligible for participation in the plan, vesting schedule, and plan benefits. Preparing, distributing, and filing reports and records as required by ERISA. Investing the plan assets in a "prudent" manner. Monitoring and reviewing the performance of plan assets. I and III only. I and II only. II and IV only. III and IV only.
B (Jan is a key bc she is greater than 5% owner and Cindy is key bc she is an officer earning more than $215k. Marsha does not qualify bc she needed greater than 5% ownership)
Who are key employees 1. Marsha, age 52, a 5% owner who earns $45k. She is not an officer 2. Jan, age 45, a 6% owner who earns $92k and an officer 3. Cindy, age 26, a 1% owner who earns $225k and an officer A. Marsha B. Cindy and Jan C. Marsha and Jan D. Jan
C (Step #1: Apply the constant growth dividend formula to value the stock as of year 3. V = 3.01(1.06) ÷ (.12 - .06) V = 53.18 Step #2: Use uneven cash flows to determine the NPV of the stock at time period zero (today). CF0 = 0 CF1 = 2.25 CF2 = 2.75 CF3 = 3.01 + 53.18 = 56.19 I = 12 NPV = ? Answer: $44.20)
XYZ company anticipates paying the following dividends, starting next year: Year 1: 2.25 Year 2: 2.75 Year 3: 3.01 After the third year, they anticipate dividends growing at 6%. If Diego's required rate of return is 12%, how much would he be willing to pay for this stock? $35.08 $40.07 $44.20 $47.38
A
You are faced with several fixed income investment options. Which of these bonds has the greatest reinvestment rate risk? A U.S. Treasury bond with an 11.625% coupon, due in five years with a price of $1,225.39 and a yield to maturity of 6.3%. A U. S. Treasury strip bond (zero-coupon) due in five years with a price of $735.12 and a yield to maturity of 6.25%. A corporate B-rated bond with a 9.75% coupon, due in five years with a price of $1,038.18 and a yield to maturity of 8.79%. A corporate zero coupon bond due in 5 years with a price of $750 and a yield to maturity of 5.9%
C (No grants are available to graduate students, only loans. Lifetime Learning Credit is a credit for tax purposes, not financial assistance direct for education. Parent PLUS Loans are loans for parents to pay for undergraduate course work. Graduate parent loans are available for graduate school, but is not an answer choice. Perkins loan program ended September 2017.)
Your client has asked you to assist her in examining possible funding methods for her daughter who is planning on attending graduate school for her MBA. Which of the following can you advise your client is/are available to assist in covering expenses? Perkins Loan Supplemental Education Opportunity Grant Supplemental Loan for Students (Stafford Unsubsidized) Parent PLUS Loan Lifetime Learning Credit I and II only. III and IV only. III only. II, III and V only.
B (You are solving for the PV of a future cashflow. Use BEGIN mode for this calculation N=35 × 12 = 420 i = 8.5/12 = .7083 PV = ? PMT = 2,500 FV = 0 Solve for PV = 337,105.5360)
Your client wants to receive payments of $2,500 from her investments at the beginning of each month during her retirement to supplement her pension plan benefits. Your client estimates she will need to receive this monthly payment for 35 years. If an 8.5% annual return is earned on investments, compounded monthly, what amount does your client need to have at the time of her retirement to fund her needs? $334,734 $337,106 $6,488,916 $6,534,879
D (Long-term employees are favored under a defined benefit plan. All of the plans will offer some degree of employee retention. With a specific benefit such as 50% of earnings, again the defined benefit plan seems a logical choice. Finally, because of PBGC, the defined benefits plan represents a "no-risk" level.)
Your client, XYZ Corporation, is considering implementing some form of retirement plan. The client states that the plan objectives are, in the order of importance: Rewarding long-term employees. Retention of employees. Providing a level of income at retirement equal to 50% of an employee's earnings. Tax-deductible funding. No-risk to employees of benefits available. The company indicates it is willing to contribute an amount equal to 30% of payroll to such a plan. The company has been in business for 22 years, and during the past decade has consistently been profitable. They furnish you with an employee census. Based upon the stated objectives, you advise XYZ Corporation that the most suitable retirement plan for the corporation would be: Money purchase plan. Non-qualified deferred compensation plan for long-term employees. Combination of defined benefit and 401(k) plan. Defined benefits plan.
D
Your client, a single-filer, has an income of $90,000. Which of the following conditions would prevent a deductible IRA contribution from being made by your client? Participated in a Section 457 deferred compensation plan. No other retirement plans were available to the employee. Made contributions to a 403(b) plan. Received retirement payments from a pension plan at age 65 (no longer an employee at the sponsoring employer). Has account in previous employer's profit-sharing plan. Received no employer contributions. No forfeiture allocations were made. Eligible to participate in a defined benefit plan, but waived participation when it was calculated that employee retirement benefits would be greater with the IRA. I, II and IV only. II, IV and V only. II, III, IV and V only. II and V only.
C (Option "A" is out-of-the-money but has nothing to do with his option through his work. Option "B" is in-the-money. Option "D" is at-the-money, meaning price of exercise and stock price are the same. Only Option "C" is out-of-the-money and addresses our client's concerns.)
Your clients, Dan & Mary both work for Terra Corporation. They have asked you, as their personal financial planner, to explain to them exactly what their human resources department was referring to in a session last week when they discussed "out-of-the-money" positions in the stock option investment plan they have at work. Of the following, which would meet that description given the current $51 per share market price of the stock? Dan holds 100 shares of company stock which he purchased through his broker at $56 per share. A portion of Mary Jo's shares were given to her at the program's inception 18 months ago and are currently exercisable at $47 per share. Dan's most recent award has an exercise price of $55 per share. Mary Jo has 225 shares of Terra, awarded with an exercise price of $51 per share.
B (Mary's net loss is $10,000 ($30,000 in damage less $20,000 in insurance proceeds) because this was business property.)
n June of this year, Mary's office building was damaged during a sudden storm. The fair market value of the building is $225,000 and her basis is $100,000. The storm caused $30,000 in damage. The insurance company awards Mary $20,000 in a settlement. What is Mary's includible gain or deductible loss? $30,000 deductible loss. $10,000 deductible loss. $20,000 includible gain. $0; this is a partial loss and not deductible.
