A client purchased a mutual fund with a $10,000 lump-sum amount four years ago. During the four years, $4,000 of dividends were reinvested. Today the shares are valued at $20,000 (including any shares purchased with dividends). If the client sells shares equal to $13,000, which statement(s) is/are correct? 1. The taxable gain can be based on an average cost per share. 2. The client can choose which shares to sell, thereby controlling the taxable gain. 3. To minimize the taxable gain today, the client would sell shares with the higher cost basis. 4. The client will not have a gain as long as he/she sells less than what he/she invested. a. (1), (2), and (3) only. b. (1) and (3) only. c. (2) and (4) only. d. (4) only. e. (1), (2), (3), and (4).
> Investing abroad has substantial individual asset risk. Why invest in it then?
> Under the semi strong form of the EMH, should you read an annual report? Why?
> Under the weak form of the EMH, if you are given the following recent day price performance: is the likely future performance higher than nine? Why? Day 2 Days Ago The Day before Yesterday Yesterday Today Price 6. 7 8 9.
> Under the EMH, can you outperform the market?
> Stocks C and D move in opposite directions. Does that mean they have no correlation? Explain.
> Mary purchased a home for $200,000. By living in the home, she saved $18,000 annually because she did not have to pay rent. She had to pay $3000 annually for upkeep of the home. By the end of the first year, the home price had appreciated to $210,000. Wh
> Stock A and stock B have no correlation. Does that mean we don’t have to include correlation in calculating portfolio return? Explain.
> How are income taxes determined for mutual funds?
> How has mutual fund performance compared with overall indexes? Why do you think that is the case?
> What are the advantages of a passive approach to investing?
> X Co. has the latest 12 months’ earnings per share (EPS) of $2.50, expected EPS in the current year of $3.00, and normalized EPS of $4.00. If its current stock price is $20, solve for its three P/E multiples based on the separate time frames given.
> If a preferred stock has annual payments of $6.00 and a required rate of return of 8 percent, what is its current price?
> Frances donated $20,000 to a charity each year. This year she thought that, instead of cash, she would donate $25,000 of a stock that cost her $8,000. She was going to sell the shares anyway. If the combined federal and state capital gains tax for France
> Harry decides to purchase an apartment building as an investment. He pays $6,000,000 for the building. The building has a net income of $150,000, annual depreciation $150,000, annual taxes of $75,000, and annual interest payments of $105,000. a. Calculat
> Henry will be giving $50,000 to each of his five children. Indicate how much of his assumed $5.34 million gift tax exemption will remain.
> Murray was in the following marginal tax brackets: federal, 35 percent; state, 7 percent; local, 4 percent. What is his total marginal tax bracket?
> Jack purchases a house for $90,000 and spends $15,000 to renovate it. He holds the house for 35 years and then sells it in middle of a real estate bubble for $400,000. On how much of that amount does he have to pay taxes?
> Harold and Mary Anne Miller are a married couple in their early 40s with three children, ages 7, 10, and 12. Harold earns $350,000 per year as General Counsel of a mid-sized IT firm and Mary Anne is a homemaker. They have major assets of $1,500,000 cash
> A young couple (both age 30) come to a financial planner with the desire for assistance in improving their family’s financial position. They have two healthy children, ages three and six. The husband is a foreman for a manufacturer of auto parts. His cur
> Six months ago, a client purchased a new bedroom suite for $6,500. For purposes of preparing accurate financial statements, this purchase would appear as a(an) 1. use asset on the client’s net worth statement. 2. investment asset on the client’s net wort
> Robert Smith asks for your help in preparing his cash flow statement. He tells you that his salary before taxes is $250,000 and that he has no mortgage on his home. Which of the following statements is true about Robert’s cash flow statement? a. The valu
> A couple wants to accumulate a retirement fund of $300,000 in current dollars in 18 years. They expect inflation to be 4 percent per year during that period. If they set aside $20,000 at the end of each year and earn 6 percent on their investment, will t
> Billy’s objective is to retire at age 65 with $2,000 in monthly retirement income, exclusive of Social Security benefits. He assumes a life expectancy of age 95. The union retirement plan will provide him with $1,000 monthly. (There are no matching contr
> A client is concerned about the impact that inflation will have on her retirement income. The client currently earns $40,000 per year. Assuming that inflation averages 5.5 percent for the first five years, 4 percent for the next five years, and 3.5 perce
> Which of the following is/are characteristics of a municipal bond unit investment trust? 1. Additional securities are not added to the trust. 2. Shares may be sold at a premium or discount to net asset value. 3. Shares are normally traded on the open mar
> According to fundamental analysis, which phrase best defines the intrinsic value of a share of common stock? a. the par of the common stock. b. the book value of the common stock. c. the liquidating value of the firm on a per-share basis. d. the stock’s
> The current annual dividend of ABC Corporation is $2.00 per share. Five years ago, the dividend was $1.36 per share. The firm expects dividends to grow in the future at the same compound annual rate as they grew during the past five years. The required r
> Joan has a choice of purchasing a car for $20,000 with 9.7 percent interest cost to borrow and a three-year repayment period for leasing the vehicle. Leasing the auto would cost $300 a month for a three-year term. The sales tax is 6 percent. The car is e
> Richard and Monica asked if they could come in to discuss an issue. At that meeting, Monica seemed worried, and Richard sunk back in his chair. Monica said Richard was having second thoughts about going ahead with the financial plan. He wanted to know wh
> Company ABC is currently trading at $35 and pays a dividend of $2.30. Analysts project a dividend growth rate of 4 percent. Your client, Tom, requires a rate of 9 percent to meet his stated goal. Tom wants to know if he should purchase stock in Company A
> The Performance Fund had returns of 19 percent over the evaluation period and the benchmark portfolio yielded a return of 17 percent over the same period. Over the evaluation period, the standard deviation of returns from the fund was 23 percent and the
> Match the investment characteristics listed below with the appropriate type of investment company in the items that follow. A. Passive management of the portfolios. B. Shares of the fund are normally traded in major secondary markets. C. Both A and B. D.
> The standard deviation of the returns of a portfolio of securities will be__________________ the weighted average of the standard deviation of returns of the individual component securities. a. equal to. b. less than. c. greater than. d. less than or eq
> Given the following diversified mutual fund performance data, which fund had the best risk-adjusted performance if the risk-free rate of return is 5.7 percent? a. Fund B because the annual return is highest. b. Fund A because the standard deviation is
> The Zeta Corporation’s current dividend is $3.85. If future dividends are expected to grow at 4 percent forever, which of the following amounts should Zeta stock sell for if the required rate of return on the stock is 14 percent? a. $28.57. b. $38.50. c.
> A $1,000 bond originally issued at par maturing in exactly 10 years bears a coupon rate of 8 percent compounded annually and a market price of $1,147.20. The indenture agreement provides that the bond may be called after five years at $1,050. Which of th
> Which combination of the following statements about investment risk is correct? 1. Beta is a measure of systematic, non diversifiable risk. 2. Rational investors will form portfolios and eliminate systematic risk. 3. Rational investors will form portfoli
> While deciding whether to equalize the estates at the death of the first spouse or to defer estate taxes until the death of the surviving spouse, it is important to consider 1. the age and health of the surviving spouse. 2. whether the combined estates e
> Which of the following circumstances would definitely cause the date-of-death value of the gifted property to be included in the donor’s gross estate? 1. Donor retains a life estate in the gift property. 2. Donor retains the power to revoke or amend the
> Item A has an NPV of $300 and an original cost of $500. Item B has an NPV of $350 and an original cost of $700. What is the profitability index (PI) of items A and B, and which is a more attractive investment?
> Mr. and Mrs. Jones own 640 acres of farmland deeded as “joint tenants, not as tenants in common.” Currently, the land is appraised at $3,000 per acre and continues to escalate annually in value. In addition, Mr. Jones holds a $250,000 CD in his name only
> Bruce, age 55, is the beneficiary of his mother’s $200,000 life insurance policy. The insurer has requested that he select a settlement option for payment of the proceeds. What factors should he consider before making the election? 1. His current income
> Doris Jenkins is a 71-year-old widow with a son and daughter ages 43 and 45, respectively, and six grandchildren. Doris has an estate currently worth $572,000, which includes her home valued at $250,000 and a life insurance policy on her life with a face
> If a client’s primary goal in making lifetime gifts to his children is to lower his estate taxes, he should make gifts of property that a. are expected to depreciate significantly in the future. b. are expected to appreciate significantly in the future.
> Five years ago, Tom Mohy bought 10,000 shares of stock at $10 per share in a pharmaceutical company. Today, the stock is worth $200,000 and is paying a dividend of $8,000 per year. Tom feels that the stock will continue to appreciate at a rate of 12 perc
> What is an appropriate standard estate planning strategy for married couples to minimize taxes over two deaths? a. Bequeath the entire estate to a trust, giving the surviving spouse a general power of appointment. b. Bequeath the applicable exclusion amo
> An individual received a bequest of 100 shares of XYZ stock from a relative who died on March 1 of this year. The relative bought the stock at a total cost of $5,500. The value of the 100 shares of XYZ stock was $5,750 on March 1. Its value rose to $6,25
> Before her death, LaDonna Kiniston, age 74, gave her three grandchildren some money for their private school education. She paid $12,000 to the school for Jake’s tuition and gave a like amount to Sarah and Nicole. What would be the adjusted taxable gifts
> Jorge is single and owns $30,000 of stock he originally purchased four years ago for $7,000. His adjusted gross income (AGI) is $40,000. If Jorge donates the stock to his church, which of the following is the maximum amount he can deduct as a charitable
> As the owner of a business, you must make an investment decision. The investment will expand your company’s production plant at a cost of $1 million. The expansion will generate income of $150,000 per year for 10 years; the required rate of return on the
> The tax bracket and holdings of your client are as follows: Federal tax bracket = 33% During the 12 months from June 30 last year through June 30 this year, the portfolio earned, in annual yield and before-tax appreciation, respectively a. 5.5% and 17.
> Your client’s federal marginal tax rate is 36 percent, and the state marginal rate is 7 percent. The client does not itemize deductions on his federal return and is considering investing in a municipal bond issued in his state of residence that yields 5
> Ron and his wife Susan, both 61 years of age, ask a CFP® professional to provide a recommendation on whether or not Susan should start to draw Social Security benefits when she first becomes eligible at age 62. Which of the following would be least impor
> A client, Tom, informs a CFP® professional that his daughter, Susie, graduated from college last month and landed her first job. Tom wants to establish a Roth IRA for Susie. Tom wants to make a $5,000 contribution for Susie and explains that she does not
> Marcus has a salary of $150,000. He contributes the maximum to his 401(k) and wishes to make the highest possible level of additional tax-deferred savings for retirement. Which of the following are feasible options for Marcus? 1. Invest in a flexible pre
> Which of the following are common actuarial assumptions used in determining the plan contributions needed to fund the benefits of a defined benefit plan? 1. Investment performance. 2. Employee turnover rate. 3. Salary scale. 4. Ratio of single to married
> Which of the following is/are true concerning nonqualified deferred-compensation plans? 1. They can provide for deferral of taxation until the benefit is received. 2. They can provide for fully secured benefit promises. 3. They can give an employer an im
> Your client, the chief financial officer of a new company, wishes to install a retirement plan in the company in which the pension benefits to employees are guaranteed by the Pension Benefit Guarantee Corporation (PBGC). Identify the plan(s) below that m
> Which one of the following statements is not true for a defined benefit plan? a. Favors older participants. b. Arbitrary annual contribution. c. Requires an actuary. d. Maximum retirement benefit of the lesser of $90,000 (indexed) or 100 percent of pay p
> The investment portfolio for a defined benefit retirement plan has declined in value during a year in which most financial market investments have incurred losses. Which one of the following entities would be impacted most by this decline in portfolio va
> John is considering buying a new car for $15,000 if purchased today. He also could wait to purchase the vehicle three years from now for $18,000. If John can invest in the capital markets and earn a 10 percent return, should he purchase the vehicle today
> An HO-3 policy (Special form—“All risks of physical loss” except those specifically excluded) with no endorsements excludes which one of the following perils? a. flood b. fire c. collapse d. weight of ice e. volcanic eruption
> Ginny is a sole proprietor. She wants to provide 60 percent of salary disability coverage to Joanna, her employee who is in a 35 percent combined tax bracket. Joanna’s W-2 wages are $40,000 and Ginny’s annual contribution to her qualified profit-sharing
> Under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, an employer is required to extend medical plan coverage to eligible members of the employee’s family if the employee 1. dies. 2. retires. 3. divorces. 4. terminates employment (pri
> Typically, when group long-term disability income insurance premiums are paid by a C corporation, all disability benefit amounts received by an employee are a. not includable in the income of the employee for federal tax purposes without regard to any ot
> Terry Underwood purchased a 15-year-old compact car with 10,000 miles for his teenage son who recently received his license. Which of the following auto insurance coverages should be included in the policy for this auto? 1. Part A—liability coverage 2. P
> A successful architect wants to purchase disability income insurance. She is concerned about becoming totally disabled, but also about a reduction in income if she is obliged to reduce her workload because of a less-than-total disability. To satisfy thes
> A client recently purchased a new home from a builder for $150,000, including the lot valued at $40,000. How much insurance would you recommend that your client purchase to cover full replacement of the house in the event of a loss? a. $88,000 b. $110,00
> Conditions that increase either the frequency or severity of loss are called a. subrogation b. risks c. hazards d. perils e. extenuating circumstances
> Bob, age 47, has worked for XYZ Company the past 12 years. XYZ Company has lost a major contract and must begin downsizing immediately. Bob was laid off yesterday. What should Bob do first? a. File for unemployment benefits. b. Roll over his company 401(
> Which of the following best describes the difference between a variable life policy and a universal life policy? a. Variable life has a variable death benefit and universal life has a fixed death benefit. b. Variable life subaccounts do not guarantee mar
> Billy is considering enrolling in an MBA program. It would cost him $22,000 a year for two years. He believes it would raise his salary, which is now $50,000 a year, by the following amounts: Year …………………………………Amount 1–5 …………………………………………..$15,000 6–10 …
> Veronica recently purchased a car for $1,500 for her 16-year-old child. Which of the following risk management techniques would be most appropriate for handling the collision exposure of this automobile? a. Subrogation. b. Insurance. c. Retention. d. Avo
> What is the main responsibility of the underwriting department of a life insurance company? a. To guard against adverse selection. b. To set a limit on the amount of insurance issued. c. To set adequate insurance rates. d. To avoid exposures that could r
> Regarding the characteristics of insurance, which of the following is/are fundamental? 1. Probability (possibility and predictability of a loss). 2. Law of large numbers. 3. Transfer of risk from individual to group. 4. Insurance is a form of speculation
> A young, single client approaches a CFP® professional with $5,000 stating that he would like to develop a financial plan and invest in the market. This is his first experience investing and he like help choosing he appropriate account. What is the CFP® p
> A client has a $1,200,000 portfolio consisting of the following four stocks: 1. $300,000 ABC @ 1.1 beta. 2. $225,000 RTR @ 0.7 beta. 3. $405,000 XYZ @ 0.3 beta. 4. $270,000 PDQ @ 1.3 beta. What is the beta of the portfolio as a whole? a. 0.8. b. 0.85. c.
> Modern “asset allocation” is based upon the model developed by Harry Markowitz. Which of the following statements is/are correctly identified with this model? 1. The risk, return, and covariance of assets are important input variables in creating portfol
> Which of the following are non diversifiable risks? 1. Business risk. 2. Management risk. 3. Company or industry risk. 4. Market risk. 5. Interest rate risk. 6. Purchasing power risk. a. 1 and 3 only b. 1 and 4 only. c. 2 and 4 only. d. 4 only. e. 1, 2,
> If the market risk premium were to increase, the value of common stock (everything else being equal) would a. Not change because this does not affect stock values. b. Increase in order to compensate the investor for increased risk. c. Increase due to hig
> If the client needs to accumulate wealth but is risk-averse, which of the following is the most crucial action the planner must take to have the client achieve the goal of wealth accumulation? Advise investing the client’s current assets a. In the produc
> Stock prices adjust rapidly to the release of all new public information.” This statement is an expression of which one of the following ideas? a. Random walk hypothesis. b. Arbitrage pricing theory c. Semi strong form of the EMH d. Technical analysis
> Marcia had a choice of two washing machines of equal performance. One cost $400 and had a present value (PV) of $230 in savings over having clothes done through an outside service. The second cost $600 and had a PV of $450. Which one should she select?
> A CFP® professional meets with two new clients who would like advice about their mortgage. In the review, the CFP® professional finds that their essential expenses exceed their income. Mortgage rates have come down significantly and they intend to refina
> A young couple would like to purchase a new home using one of the following mortgages: Mortgage no. 1: 10.5 percent interest with 5 discount points to be paid at time of closing Mortgage no. 2: 11.5 percent interest with 2 discount points to be paid at t
> The Moores recently found out that they can reduce their mortgage interest rate from 12 percent to 8 percent. The value of homes in their neighborhood has been increasing at the rate of 7.5 percent annually. If the Moores were to refinance their house wi
> A cash-basis taxpayer includes income from a service business when a. The services are performed. b. The client is invoiced for the services. c. The client’s check is deposited in the bank. d. The client’s check is received.
> A client provides a current balance sheet to the financial planner during the initial data gathering phase of the financial planning process. This financial statement will enable the financial planner to gain an understanding of all of the following exce
> Why is integration so important in financial planning?
> Describe some similarities and differences between a financial planning practitioner and a physician.
> Contrast a segmented and a comprehensive financial plan.
> Describe the personal financial planning process and relate it to planning procedures.
> Explain the terms PV and FV.
> Helen, a sociologist, is considering buying a new power lawn mower. It would save her 30 minutes of work a week, which she would use to see another client. Her fee is $16 per hour and she works 50 weeks a year. The lawn mower would cost $1,400. What woul
> Why does personal financial planning involve other disciplines as shown in Figure 1.3? Give some practical examples of their use. Figure 1.3: FINANCE TOOLS OTHER DISCIPLINES AND TOOLS Micro and macroeconomics - Time value of money - Cash flow analy
> Why did it take until the 1970s for the field of financial planning to begin?
> Explain withdrawal risk.
> Why is it advisable to have a significant amount of a retirement portfolio invested in equity?
> How does investing for retirement differ from investing after retirement? Why?
> What are the similarities and differences between retirement needs and insurance?
