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AWMA Test Review 1 Questions With
Correct Answers
If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, what is its
taxable income?
A. $0
B. $25,000
C. $50,000
D. $100,000 - answer✔✔The net profits of a corporation are subject to federal income taxation.
This tax is levied on corporate taxable income before payment of dividends to common and
preferred shareholders. Thus, if ABC Corporation has net profits of $100,000 and distributes
$50,000 as dividends, its taxable income is still $100,000. Distribution of profits as dividends
does not reduce taxable income for a corporation
Qualified Plans - answer✔✔Meet the stringent requirements of the IRC as well as those of the
ERISA and therefore qualify for favorable tax treatment. In pension and profit sharing plans an
employee is generally not taxed on employer contributions or accumulated earnings until the
funds are actually received from the plan. The employer receives a deduction at the time of
contribution. for qualified stock option plans the employee is not taxed until it is sold.
Nonqualified plans - answer✔✔Do not qualify for special tax treatment. They don't permit the
employer to take a deduction for plan contributions until the employee reports income from the
plan, which is often at retirement. Earnings not tax deferred - earnings are taxed to the employer
or employee depending on the plans design
Nonqualified deferred comp plan - answer✔✔Do not qualify for the same special tax treatment.
They do not permit the employer to take a deduction for plan contributions until the employee
reports income from the plan, which is often at retirement. Also, the earnings on plan assets are
not tax deferred; instead, earnings are taxed to the sponsor(employer) or to the participant
(employee), depending on the plan design. The irs rules do permit an employee to agree to defer
income to a nonqualified plan and not be taxed on the deferral until some point in the future if
the 3 rules are followed.
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Economic Benefit - answer✔✔A taxpayer has income when he receives the economic benefit of
the proceeds. This occurs when the employer irrevocably places funds for the benefit of the
employee beyond the reach of the employers creditors. Income is thus received if the employee
does not have actual or even constructive receipt.(applies to funded plans)
Corporate owned life insurance - answer✔✔commonly used by employers to informally fund
future benefit obligations such as those promised under a deferred comp plan. As the owner of
the policies the employer is responsible for paying the premiums. The employer is also the
beneficiary of the policies and retains all rights to policy benefits, including the cash value
buildup and the death proceeds.
COLI is attractive to employers because it - answer✔✔1. Provides psychological assurance to
deferred comp plan participants that their benefit are secure.
2. reduces strain on the companys cash flow when plan distributions are due
3. provides tax-deferred, and possibly tax free buildup of cash value; and
4. enables the employer to recover some/all of the plan costs.
Changes that have occurred since investment firms changed from private partnerships to publicly
traded companies include all of the following except:
A. risk taking has increased.
B. profits can be privatized (bonuses) and losses socialized (bailouts).
C. there is greater individual accountability.
D. partners no longer share in both the profits and losses of the firm. - answer✔✔C. The repeal
of Glass-Steagall accelerated the conversion of investment firms that had been structured as
partnerships into publicly traded companies that took on more risk. This transferred much of the
risk and accountability from general partners to public shareholders
Equity REITS - answer✔✔Equity REITs own real estate properties and earn income from rents,
and made up 94.4% of the REIT market (by capitalization) at the end of 2015. Upon the sale of
the properties, a capital gain is earned. Generally, income from rents can be expected to increase
each year. Equity REITs are appropriate when one objective is to provide an inflation hedge
Mortgage REITs. - answer✔✔Mortgage REITs are similar to bond mutual funds, and make up
approximately 5.6% of the REIT market. No ownership interest in the underlying real estate
property exists. Instead, the fund invests in mortgages used by equity owners of the real estate
properties to finance their acquisition of the properties. Mortgage REITs may also invest in
GNMA. pools or other mortgage backed securities. They generally do not participate in capital
gains on the sale of real estate properties, but their income is higher than that of equity REITs.
Mortgage REITs do not provide inflation
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protection.
Which one of the following is an advantage of equity REITs over mortgage REITs? -
answer✔✔Equity REITs can participate in the appreciation of the underlying properties.
Equity REITs own the underlying real estate properties, giving the owners an opportunity to
participate in the net cash flows from the operation of the properties and in any appreciation in
the market price of the properties.
- answer✔✔The intent of Dodd-Frank was to "harmonize" and blend fiduciary rules that would
pertain to both broker-dealers and investment advisers. Investment advisers are held to a
fiduciary standard and broker-dealers to a suitability standard under the current rules
One of the most important financial goals of wealthy individuals is - answer✔✔The most-stated
life goals for wealthy individuals are having good health, travelling the world, and achieving
financial success. To achieve financial success, the most common financial goals are protecting
wealth, assuring retirement lifestyle, minimizing taxes, and leaving an estate to their heirs.
There are several kinds of strategies hedge funds use, and some approaches can be categorized.
The CAIA divides hedge funds into four main categories: - answer✔✔1. market directional,
2. corporate restructuring,
3. convergence trading, and
4. opportunistic.
Equity (sector) long/short (market Directional) - answer✔✔This is your classic hedge fund
approach, where the fund manager goes long a core group of stocks while also being short other
stocks, and/or futures or stock index options. At any given time the fund manager may be net
long or net short. For example, in bull markets, managers tend to be
net long, and in a bear market they may be net short. Sector long/short funds are just that—where
a fund manager specializes in a particular sector of the market, such as technology or health care.
The fund manager would go long stocks in the
category he or she believes will go up more in bull markets than the stocks he or she is short, and
in bear markets the expectation would be that the short stock positions would go down more than
the long stock positions.
Emerging markets (market Directional) - answer✔✔Investing in emerging markets primarily
involves long positions, and the inefficiencies in terms of market and company information in
emerging markets may give hedge fund managers an edge if they study and get to know the
market. Specialized knowledge can be gained by having a presence in a country and becoming
an expert on various investment alternatives available
