AWMA Exam 2 questions with verified answers
A rabbi trust is
A) a form of revocable grantor trust established by an employee.
B) a form of irrevocable grantor trust established by an employer.
C) a form of revocable grantor trust established by an employer.
D) a form of irrevocable grantor trust established by an employee.
Ans✓✓✓ B) A rabbi trust is a form of irrevocable grantor trust
established by an employer. Mod 6
All of the following are advantages to implementing a nonqualified
deferred compensation plan, except
A) it allows employers to attract and retain key employees.
B) NQDC plans are always free from ERISA regulations.
C) there are no nondiscrimination rules.
D) the NQDC can be offered to a select group of employees. Ans✓✓✓
B) Depending on the type of NQDC plan, it may be subject to some of
ERISA's regulations. Mod 6
Allen is willing to invest in securities with above-average risk if he is
rewarded for doing so. He has been following the stock of a company
that he likes, but is concerned because the stock dropped 8% the last
time the S&P 500 dropped 6%. Allen believes that an 11% return for the
,market next year would be good. The current market risk premium is
7% and the Treasury bill rate is 6.5%. Using the CAPM formula,
calculate the required rate of return for the stock and determine if the
stock appears to meet Allen's criteria of investing in above-average-risk
stocks only if he is rewarded for doing so.
A) The required rate of return is 15.6%, and the stock meets Allen's
criteria.
B) The required rate of return is 12.4%, and the stock does not meet
Allen's criteria.
C) The required rate of return is 14.9%, and the stock meets Allen's
criteria.
D) The required rate of return is 17.6%, and the stock meets Allen's
criteria. Ans✓✓✓ A) The required rate of return is 6.5% + (7%) 1.3 =
15.6%. The fact that Allen believes 11% would be a good return is not
relevant for computation of the required rate of return—only the
computed market risk premium is relevant. The market return is
computed as 7% + 6.5% = 13.5%. Allen will invest in an above-average
risk stock (beta = 1.3) if he can be rewarded for taking the extra risk. He
is rewarded because he can expect to earn 2.1% more than the market
return by taking the extra risk. Mod2
An advantage to a third-party business sale is that
A)it is the least expensive method to sell a business.
B)it ensures the company will remain in the community.
,C) the owner will receive the majority of the sales proceeds well after
the change in control.
D)the sale can be accomplished in a relatively short time frame.
Ans✓✓✓ D) A third-party transfer can usually be accomplished in one
year or so. Insider transfers and transfers to children can take several
years to accomplish. Third-party sales provide for most of the cash
flows to be front loaded, which is an advantage, rather than a
disadvantage, over other exit planning strategies. Mod 4
Assume that, during the current tax year, Jake has a short-term capital
loss of $9,000 from the sale of stocks. He also has a long-term capital
gain from the sale of a sports memorabilia collection of $5,500 and has
unrecaptured Section 1250 income of $14,000 from the sale of a
residential rental property. Jake is in the 32% marginal income tax
bracket. What is the tax result from the capital transactions?
A) $10,500 unrecaptured Section 1250 income taxed at 25%
B) $10,500 of Section 1202 gain that is not taxed
C) $3,500 short-term capital loss carryforward and $14,000
unrecaptured Section 1250 income taxed at 25%
D) $5,000 unrecaptured Section 1250 income taxed at 25% and $5,500
collectibles gain taxed at 28% Ans✓✓✓ A) The short-term capital loss
is first used to offset the collectibles gain of $5,500. This leaves a short-
term capital loss of $3,500. This is next used to offset the 25% gain. The
$14,000 is offset by the $3,500 remaining capital loss. This leaves
$10,500 of unrecaptured Section 1250 income, taxed at a maximum
, 25% rate. This is the most favorable manner of offsetting the capital
losses against the capital gains. Mod 5
Assume that, in the current year, Thaddeus has the following:
•investment interest expense of $4,000,
•interest income and short-term capital gains of $3,600, and
•investment adviser's fees of $5,000.
Assume that Thaddeus has AGI of $225,000. What amount of
investment interest expense, if any, that may be deducted in the
current year?
A) $5,000
B)$0
C)$4,000
D)$3,600 Ans✓✓✓ D) The investment interest expense of $4,000 is
deductible up to the amount of net investment income. The net
investment income is the $3,600 of interest and short-term capital
gains. Thus, of the $4,000 of investment interest paid, $3,600 is
currently deductible as investment interest expense, and the remaining
$400 of investment interest expense may be carried forward into next
year's calculation. Mod 5
Buy-sell agreements ensure
A rabbi trust is
A) a form of revocable grantor trust established by an employee.
B) a form of irrevocable grantor trust established by an employer.
C) a form of revocable grantor trust established by an employer.
D) a form of irrevocable grantor trust established by an employee.
Ans✓✓✓ B) A rabbi trust is a form of irrevocable grantor trust
established by an employer. Mod 6
All of the following are advantages to implementing a nonqualified
deferred compensation plan, except
A) it allows employers to attract and retain key employees.
B) NQDC plans are always free from ERISA regulations.
C) there are no nondiscrimination rules.
D) the NQDC can be offered to a select group of employees. Ans✓✓✓
B) Depending on the type of NQDC plan, it may be subject to some of
ERISA's regulations. Mod 6
Allen is willing to invest in securities with above-average risk if he is
rewarded for doing so. He has been following the stock of a company
that he likes, but is concerned because the stock dropped 8% the last
time the S&P 500 dropped 6%. Allen believes that an 11% return for the
,market next year would be good. The current market risk premium is
7% and the Treasury bill rate is 6.5%. Using the CAPM formula,
calculate the required rate of return for the stock and determine if the
stock appears to meet Allen's criteria of investing in above-average-risk
stocks only if he is rewarded for doing so.
A) The required rate of return is 15.6%, and the stock meets Allen's
criteria.
B) The required rate of return is 12.4%, and the stock does not meet
Allen's criteria.
C) The required rate of return is 14.9%, and the stock meets Allen's
criteria.
D) The required rate of return is 17.6%, and the stock meets Allen's
criteria. Ans✓✓✓ A) The required rate of return is 6.5% + (7%) 1.3 =
15.6%. The fact that Allen believes 11% would be a good return is not
relevant for computation of the required rate of return—only the
computed market risk premium is relevant. The market return is
computed as 7% + 6.5% = 13.5%. Allen will invest in an above-average
risk stock (beta = 1.3) if he can be rewarded for taking the extra risk. He
is rewarded because he can expect to earn 2.1% more than the market
return by taking the extra risk. Mod2
An advantage to a third-party business sale is that
A)it is the least expensive method to sell a business.
B)it ensures the company will remain in the community.
,C) the owner will receive the majority of the sales proceeds well after
the change in control.
D)the sale can be accomplished in a relatively short time frame.
Ans✓✓✓ D) A third-party transfer can usually be accomplished in one
year or so. Insider transfers and transfers to children can take several
years to accomplish. Third-party sales provide for most of the cash
flows to be front loaded, which is an advantage, rather than a
disadvantage, over other exit planning strategies. Mod 4
Assume that, during the current tax year, Jake has a short-term capital
loss of $9,000 from the sale of stocks. He also has a long-term capital
gain from the sale of a sports memorabilia collection of $5,500 and has
unrecaptured Section 1250 income of $14,000 from the sale of a
residential rental property. Jake is in the 32% marginal income tax
bracket. What is the tax result from the capital transactions?
A) $10,500 unrecaptured Section 1250 income taxed at 25%
B) $10,500 of Section 1202 gain that is not taxed
C) $3,500 short-term capital loss carryforward and $14,000
unrecaptured Section 1250 income taxed at 25%
D) $5,000 unrecaptured Section 1250 income taxed at 25% and $5,500
collectibles gain taxed at 28% Ans✓✓✓ A) The short-term capital loss
is first used to offset the collectibles gain of $5,500. This leaves a short-
term capital loss of $3,500. This is next used to offset the 25% gain. The
$14,000 is offset by the $3,500 remaining capital loss. This leaves
$10,500 of unrecaptured Section 1250 income, taxed at a maximum
, 25% rate. This is the most favorable manner of offsetting the capital
losses against the capital gains. Mod 5
Assume that, in the current year, Thaddeus has the following:
•investment interest expense of $4,000,
•interest income and short-term capital gains of $3,600, and
•investment adviser's fees of $5,000.
Assume that Thaddeus has AGI of $225,000. What amount of
investment interest expense, if any, that may be deducted in the
current year?
A) $5,000
B)$0
C)$4,000
D)$3,600 Ans✓✓✓ D) The investment interest expense of $4,000 is
deductible up to the amount of net investment income. The net
investment income is the $3,600 of interest and short-term capital
gains. Thus, of the $4,000 of investment interest paid, $3,600 is
currently deductible as investment interest expense, and the remaining
$400 of investment interest expense may be carried forward into next
year's calculation. Mod 5
Buy-sell agreements ensure
