Unit 18 Type of Client
The shares of the LMN closed-end management investment company are selling at $45, while LMN's net asset value is $40. It would be most accurate to say that LMN's shares are trading at A) a 12.5% premium to NAV. B) a 12.5% discount to NAV. C) an 11.1% discount to NAV. D) an 11.1% premium to NAV.
A. The shares are selling at a $5 premium to the NAV. Mathematically, this is $5 divided by the $40 NAV, or a 12.5% premium. U14LO3
One respect in which an LLC differs from an S corporation is that A) there is no statutory limit on the number of investors in an LLC B) an LLC can be formed with as little as a single investor C) not only income, but losses, if generated, pass through to investors in an LLC D) there is more favorable tax treatment afforded to members of an LLC
A. There is no limit to the number of investors (members) in an LLC, while current regulations limit the number of investors (shareholders) in an S corporation to 100. The tax treatment is the same, and both can be formed with a single owner. U18LO3
According to the Investment Company Act of 1940, all of the following statements are true EXCEPT A) 12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors B) mutual fund shareholders must be sent semiannual statements that identify compensation paid to directors, officers, and other affiliated persons C) persons convicted within the past 10 years of a securities industry crime are not allowed to serve as directors without SEC permission D) investment companies can own no more than 3
B. 12b-1 fees are subject to annual approval by a vote of the board of directors of the company and of the directors who are not interested persons (outside directors) of the company. U14LO4
When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as A) program-related investing B) asset allocation C) impact investing D) engineered investing
C. Impact investing can be defined as the intentional allocation of capital to generate a positive social or environmental impact. U18LO2
Sam Jones has been a successful businessman and is concerned that his youngest daughter will not be able to live within her means. To protect this from happening, Jones places a certain sum of money into a trust for the benefit of the daughter. Because Jones knows he won't live forever, he arranges for the Fidelity Bank and Trust Company to have control over the assets. In this case, Sam Jones is the grantor Sam Jones is the trustee Fidelity Bank and Trust Company is the trustee Sam Jones's daughter is the beneficiary A) II and III B) I and III C) I, III, and IV D) II, III, and IV
C. The person who funds the trust is the grantor or settlor. The bank has been appointed to be trustee, and the daughter is the beneficiary of the trust. U18LO4
Which of the following types of business organizations do not protect owners' personal assets from losses incurred by the business? General partnership Sole proprietorship S corporation C corporation A) I only B) I and II C) III and IV D) II and III
B. Corporations, whether organized as C or S corporations, afford their owners limited liability, which is the protection of their personal assets from losses incurred by the businesses. General partnerships and sole proprietorships subject their owners to personal liability for losses of the business. U18LO3
A client with a sizable estate would probably find it most efficient to pay estate taxes with A) cash B) proceeds from a life insurance policy C) proceeds from the liquidation of a diversified portfolio D) proceeds from the liquidation of a tax-deferred retirement plan
B. In general, people with estates where there is a potentially large estate tax liability find that the most efficient way to pay those taxes is through a life insurance policy. U18LO5
All of the following statements relating to an account registered as tenants in common are true EXCEPT A) upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s) B) each cotenant has an undivided interest in the entire account C) cotenants can own unequal percentages of the assets in the account D) this form of registration is less common for married couples than JTWROS
B. Unlike an account registered JTWROS, when a cotenant in a TIC account dies, that individual's share of the account passes to the individual's estate, not the other cotenant(s). That would be the case with JTWROS (which is why that form is far more popular with married couples instead of TIC). In a TIC account, each cotenant has an undivided interest (specific securities in the portfolio are not designated to each cotenant—they share ownership in the entire portfolio). This is not to be confused with the fact that the ownership interests can be unequal. For example, one investor can own 40% of the account and the other 60%. U18LO2
Under the Investment Company Act of 1940, which of the following are considered management companies? Open-end companies Closed-end companies Unit investment trusts Face-amount certificate companies A) III and IV B) I and III C) I and II D) II and IV
C. Management companies are subclassified into open-end companies (mutual funds) and closed-end companies. Unit investment trusts are a type of investment company that is not managed, as are face-amount certificate companies. U14LO1
Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative can A) have a check drawn on the account payable to the trustee for expenses B) have funds withdrawn from the account at the direction of the beneficiary C) arrange to have the trust's funds pledged to support a loan for the trustee D) place the securities in the trust fund in a noncustodial brokerage account
A. The trustee can be reimbursed for expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can withdraw funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial or trust accounts, not in noncustodial accounts. U18LO4
In which type of real estate investment does an investor have a reasonable expectation of receiving periodic distributions in the form of dividends? A) A real estate investment trust (REIT) B) Undeveloped land C) Rental real estate D) The purchase of a primary residence
A. A REIT is an indirect form of ownership of real estate. For tax purposes, at least 90% of the REIT's investment income is distributed to investors in the form of a taxable dividend. Unlike DPPs, there is no flow-through of losses. U14LO9
If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk? A) Loss of principal B) Changes in interest rates C) Loss of liquidity D) Loss of diversification
A. A mutual fund with a portfolio of common stock is subject to market risk. If the market falls, the value of the fund's shares also fall, subjecting the owner to loss of principal. U14LO10
A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding, the net asset value per share is closest to A) $32.55 B) $26.11 C) $36.38 D) $34.46
A. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the net assets are the $100 million portfolio value minus the liabilities of $10 million for the unpaid securities plus the $5 million in accrued management fees. That leaves $85 million divided by the 2,611,437 shares outstanding which is approximately $32.55. U14LO3
One of your clients dies. You could legally take instructions regarding the individual's estate from A) a CPA who prepared the deceased's tax return B) the spouse of the deceased C) a person with durable power of attorney D) the administrator in intestacy
D. If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power. U18LO4
Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? 150 new investors buy into the corporation during the year. 1 new member is a nonresident alien. 50% of the corporation's income is derived from passive investments in limited partnerships. The corporation issues several classes of stock. A) I, II, III, and IV B) I only C) I and II D) I, II, and III
A. S corporations must not have more than 100 stockholders, and each stockholder must be a citizen or resident of the United States. The corporation can only have 1 class of stock, and no more than 25% of the corporation's income can come from passive activities. If you were not sure of this last fact, a useful test-taking technique is recognizing that all the other choices are correct and there is no way to select them without this one. U18LO3
Mr. and Mrs. Williams are a retired couple receiving most of their income from a diversified portfolio of high-quality bonds and preferred stock. One of the reasons that life insurance might be a useful addition to their overall planning is that A) the premiums can be paid directly from their brokerage account B) the proceeds of a life insurance policy are free of income tax C) upon the death of the insured, the insurance provides liquidity to preserve income-producing assets from having to be liquidated to cover death expenses D) dividends received on a life insurance policy are tax free
C. Even for those whose estate is not large enough to incur estate tax, life insurance proceeds provide liquidity to cover the expenses incurred at death without having to sell assets out of the portfolio. It is true that the proceeds are free of income tax, but that is not the major reason to own life insurance. U18LO5
