Series 7 Unit 13

You have a client who plans to liquidate some CDL stock to help pay for an upcoming family vacation. When checking the account record, you find the following transactions: Jan 4, 100 shares @ $48 Feb 8 100 shares @ $39 May 11, 200 shares @$43 The client needs about $4,000 and the CDL is currently selling for $44 per share. From a tax standpoint, you should probably recommend that the client A) sell all of the shares purchased on January 4. B) sell all of the shares purchased on February 8. C) sell 100 of the shares purchased on May 11. D) sell half of the shares purchased on January 4 and half of the shares purchased on February 8.

A By using FIFO, the default method of the IRS, and selling the shares purchased in January at $48 per share, the client realizes a loss of $400. Selling either of the others results in a short-term capital gain, taxed at ordinary income rates. Don't get hung up on the fact that the investor will receive $300 more than needed— the question is looking for tax considerations.

Which of the following is defined as profits after taxes and interest paid, less preferred dividends, divided by the number of shares of outstanding common stock? A) Earnings per share (EPS) B) Price to earnings C) Book value per share D) Cash flow per share

A Dividing net income after taxes, interest, and payment of preferred dividends by the number of common shares outstanding determines EPS.

A corporation has a net income of $5.2 million after taxes. If 4 million shares of common stock are outstanding, the earnings per share (EPS) is A) $1.30. B) $0.80. C) $1.78. D) $5.20.

A Earnings per share equals net income (less preferred dividends) divided by the number of common shares outstanding. In this case, $5.2 million divided by 4 million equals an EPS of $1.30.

The Bond Buyer's 30-Day visible supply includes issues of notes sold on a competitive basis. issues of bonds sold on a competitive basis. issues of notes sold on a negotiated basis. issues of bonds sold on a negotiated basis. A) III and IV B) II and IV C) I and III D) I and II

B

The Bond Buyer compiles several indexes of municipal bonds. Which of the following is limited to bonds with the highest ratings? A) The 20 Bond Index B) The Revdex 25 C) The 11 Bond Index D) The 40 Bond Index

C

All of the following will affect the working capital of a corporation except A) an increase in current assets. B) a decrease in current liabilities. C) payment of a cash dividend. D) declaration of a cash dividend.

C Working capital is defined as current assets minus current liabilities. On the declaration date, the future dividend payment is "booked" as a current liability (dividend payable). When the payment date comes, disbursement of the cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged.

If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A) $50,000 B) $90,000 C) $100,000 D) $0

D Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes.

An investor purchases 100 shares of CDE on December 20, 2019, for $2,000. On the same day, he purchases 100 shares of QRS for $2,000. On January 3, 2020, he sells the CDE stock for $1,700 and the QRS stock for $2,200. On January 24, 2020, he purchases 200 shares of CDE for $3,000. What capital gains or losses did he realize from these transactions? A) $300 loss in CDE and $200 gain in QRS B) $300 loss in QRS and $200 gain in CDE C) $300 loss in CDE D) $200 gain in QRS

D The investor in this question has a $200 capital gain to report on the purchase of QRS stock for $2,000 and its subsequent sale for $2,200. Because the investor repurchased the CDE stock (January 24) within 30 days of selling it (January 3), the $300 loss incurred ($2,000 - $1,700 = $300) when sold is disallowed under the wash sale rule.

Based on yesterday's closing price of $60 per share, Blech Sheet Metal, Inc., has a current P/E ratio of 12:1. If the current quarterly dividend payment is $0.50 per share, the dividend payout ratio is A) 16.66%. B) 3.33%. C) 10%. D) 40%.

D With a price-to-earnings ratio of 12:1, the earnings per share (EPS) is $5.00 ($60 divided by 12). Four quarterly dividends of $0.50 is an annual dividend of $2.00 per share. If the company is paying $2 per share from the $5 per share earnings, that is a dividend payout ratio of 40%.

If a married couple establishes a joint tenants with right of survivorship (JTWROS) account with a balance of $1 million and the wife dies, what is the husband's estate tax liability? A) He pays no estate tax. B) He pays federal taxes only on $500,000. C) He pays federal and state taxes on $500,000. D) He pays federal and state taxes on the entire balance.

A Establishing a JTWROS account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.

At the birth of a grandchild, your customers, the child's grandparents, purchased 1,000 shares of XYZ stock at $10 per share in their JTWROS account. The child is now an adult and the grandparents gift all the shares to their grandchild when the stock price is $50 per share. If the donee sold all the shares at $55 per share, the tax consequences would be a capital gain of A) $45,000. B) $50,000. C) $5,000. D) $55,000.

A The capital gain would be $45,000 ($55,000 - $10,000). If a gift is made of securities, the donee must use the original cost basis of the donor to calculate the gain or loss on a sale. In this case, the original cost basis for the grandparents was $10,000. The difference between that and the proceeds of $55,000 is a capital gain of $45,000. If the shares were inherited from the grandparents, the grandchild would have received the stock at a stepped-up cost basis, the price of the stock on the decedent's death. Using our numbers, that would be a capital gain of $5,000, the difference between the stepped-up basis of $50,000 and the proceeds of $55,000.

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes? A) $100 B) $75 C) $40 D) None

B Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule: investors who sell securities at a loss and repurchase them, including their equivalents, 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 ÷ 40) of KLP common stock. Hence, the investor has bought back the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed.

A corporation has $20 million net income after taxes, 7 million common shares outstanding, and $15 million of 6% preferred stock ($25 par). What is the corporation's earnings per share (EPS)? A) $2.54 B) $2.73 C) $2.86 D) $2.83

B Begin by calculating how much of the net income is available for common stockholders (net income after taxes minus preferred dividends results in the earnings available for common stockholders). The preferred stockholders received $900,000 in dividends ($15 million par × 6% = $900,000), or 600,000 shares × $1.50 per share = $900,000). After subtracting $900,000 from the net income of $20 million, this leaves $19.1 million (earnings available for common stockholders). Compute EPS (earnings available for common ÷ number of common shares outstanding = $19.1 million ÷ 7 million shares = $2.73 per share EPS).

An analyst reports that a stock's price is consolidating. This means A) the stock's trendline is moving primarily in a downward direction. B) the stock's trendline is moving primarily in a horizontal direction. C) no distinct pattern can be observed. D) the stock's trendline is moving primarily in a upward direction.

B In general, when the trendline of a stock's market price is moving within a very narrow range (the chart is basically a pattern of horizontal movement), the technician views that as a consolidation. Within a relatively short time after the consolidation has been verified, it is expected the price will move. What isn't determined yet is if the movement will be up (bullish) or down (bearish).

If ALFA Securities, a broker-dealer, is a position-trading firm, which of the following statements is true? A) It is underwriting securities in the primary market. B) It is trading for its own account. C) It is violating NYSE rules. D) It is acting as a broker for customers.

B Position trading is simply trading as principal, or dealer, for a firm's own account. This is the typical case with a market maker. The opposite role is that of a broker, or an agent, purchasing or selling securities in the secondary market for customers

If stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average, are declining daily, and the number of declining stocks relative to advancing stocks is falling, a technical analyst will conclude that the market is A) becoming volatile. B) oversold. C) overbought. D) unstable.

B The momentum of the market decline seems to be easing as the number of decliners to advancers is leveling out. It looks like the advance/decline line is moving in a direction away from decliners. A technical analyst would conclude that the market is oversold and approaching a bottom.

A customer sells 100 shares of ABC at $15 and uses the proceeds to purchase 200 shares of MNO for $7.50. In order to avoid a violation of FINRA's 5% markup policy, the member firm should not charge a commission of more than A) $125. B) $75. C) $150. D) $15.

B This is an example of a proceeds transaction. In order to stay within compliance of FINRA's 5% markup policy, the member firm should treat this as a single transaction. The most the member firm should charge would be 5% of $1,500 (the principal value of one side of the trade), or $75.

A customer who owns TCB stock wants to continue holding the security. The stock has fallen from 26 when he bought it on February 2 to a 52-week low of 20.75. He sells the stock on December 1 at the low and repurchases it at 21 on December 15. What is the tax consequence of this investment? A) He has a capital loss. B) By repurchasing the investment at the same price, he keeps the original cost basis. C) The tax loss is not allowed. D) The holding period for the stock was wiped out.

C Because the security was repurchased in less than 30 days, the IRS will not allow the loss due to the wash sale rule. It would have been allowed had the customer bought back the security after 30 days.

Which of the following balance sheet entries may be affected when a company pays a cash dividend? Shareholders' equity Total assets Total liabilities Working capital A) I and III B) I and IV C) II and III D) II and IV

C When a company pays a cash dividend, the dividends payable (a current liability) and the cash account (current assets) are reduced by the same amount. Because liabilities and assets are each reduced by the same amount, working capital is not affected. Shareholders' equity—or net worth—is also not affected when the dividend is paid.

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed? A) Wash sale rules B) Last in, first out (LIFO) C) First in, first out (FIFO) D) Identified shares

C When a customer does not choose a method, the IRS uses FIFO. This will likely result redeeming shares with the lowest cost basis first, which creates a greater taxable gain.