Diagnostic Exam and Book 1 Flashcards
How does the federal reserve control the money supply?
a. adjusting the discount rate b. open market operations i.e. buying government securities
Calculate Next year Dividend (D1)
D1 = D0(1+g)
Forecasted Total Return
[(Forecasted stock $ - Current Price) / Current $] + Dividend yield Dividend yield is shown as a percentage. It’s calculated by dividing the dollar value of dividends paid in a certain year per share of stock held by the dollar value of one share of stock. It equals the annual dividend per share divided by the stock’s price per share. For example, if a company’s annual dividend is $1.50 and the stock trades at $25, the dividend yield is 6 percent: $1.50 / $25 = 0.06. Yields for a current year can be estimated using the previous year’s dividend yield or by using the latest quarterly yield, multiplying it by 4, then dividing by the current share price.su
Expected Return (CAPM)
Rf + Beta (risk premium)
Risk Premium
Market return - risk free rate
If the forecasted return is greater than the expected return then you should _____ the security
buy
If the forecasted return is less than the expected return then you should ______ the security
not buy/sell
What is the double basis rule?
No gain is realized if the donee sells the property for a price between the adjusted basis and the fmv on the date of the gift. Example: Mom gives son property with adjusted basis of $35k and fmv of $30k…the son then sells at $33k…this results in no gain
Are SSI benefits reduced if at FRA and have earned income?
No the benefits aren’t reduced, but a greater portion will likely be taxable - NOT BASED ON EARNED INCOME ALONE…(such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return). Up to 50% or even 85% of your Social security benefits are taxable if your “provisional” or total income, as defined by tax law, is above a certain base amount. Your Social Security income may not be taxable at all if your total income is below the base amount. If you’re married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income. Combined Income = Adjusted Gros Income + Non-taxable Interest + 1/2 of your Social Security benefits Individual - - 50% of benefits are taxed when your combined income is between $25,000 and $34,000 -85% of benefits are taxed when your combined income is more than $34,000 File Joint Return - - 50% of your benefits are taxed when you and your spouse have a combined income that is between $32,000 and $44,000 -85% of benefits are taxed when your combined income is more than $44,000
Do CFP’s have to be registered as an investment adviser?
No
Name four organizations that rate the financial strength of life insurance companies
Standard and Poors, Fitch, Moody’s, and AM Best Standard and Poors AAA (Highest) AA+ (Second Highest) BBB- (Last Investment Grade) Fitch AAA (Highest) AA+ (Second Highest) BBB- (Last Investment Grade) Moody Aaa (Highest) Aa1 (Second highest) Baa3 (Last Investment Grade)
Under Medicare Part A, do skilled nursing facilities benefits provide any coverage for custodial care?
No Because custodial caregivers for seniors aren’t required to have any formal medical training, these providers typically are limited to performing certain basic duties. Primarily, they can help with the activities of daily living (ADLs) such as bathing, dressing, grooming, eating, going to the bathroom and offering ambulatory assistance. Medicare: Medicare typically doesn’t cover custodial care benefits, but it may for a short period (100 days or less) if it is combined with skilled medical care that is prescribed by a physician. When utilized in unison with private insurance, Medicare can be a useful supplement in certain situations. Medicaid: One must meet strict financial requirements to qualify for state-administered Medicaid services to pay for custodial care. Furthermore, this program typically requires that beneficiaries be under care within an approved facility such as a nursing home or assisted living. While benefits vary from state-to-state, some will cover adult day care and homemaker services for seniors who qualify. Long Term Care Insurance: Long term care insurance (LTC) is one of the best options for paying for senior custodial care, especially when combined with supplemental Medicare coverage. These fixed-priced policies vary in coverage, but often provide reimbursement for care for several years.
Which of the following types of student financial aid is(are) need-based? Subsidized Stafford Loan. Unsubsidized Stafford Loan. Parent Loan for Undergraduate Students (PLUS) Loan. Perkins Loan.
Subsidized Stafford Loans and Perkins Loans or undergraduate students who have financial need; U.S. Department of Education generally pays interest while the student is in school and during certain other periods; a student must be enrolled at least half-time.Interest rates for new Direct Subsidized Loans can change every year. Loans made to undergraduate students during the 2018–19 award year have the rate fixed at 5.05% for the life of the loan. Up to $5,500 depending on grade level and dependency status. Stafford loans, also known as Federal Family Education Loans (FFEL), are federal student loans available to college students. Subsidized loans are based on need; this is determined by evaluating your available resources. You won’t be charged any interest on the loan while you’re in school or during a deferment period. The federal government makes these payments as long as you are in school. Unsubsidized loans aren’t based on need. Interest begins to accrue as soon as the loan is disbursed and is added on to the loan balance after graduation It must be used to pay for tuition and fees, room and board, and other school charges. If any money remains, you’ll receive the remaining funds by check or a direct deposit to your bank account, unless you ask the school to hold the funds to apply towards the next enrollment period. Important: Under federal law, the authority for schools to make new Perkins Loans ended on Sept. 30, 2017, and final disbursements were permitted through June 30, 2018. As a result, students can no longer receive Perkins Loans. A borrower who received a Perkins Loan can learn more about managing the repayment of the loan by contacting either the school that made the loan or the school’s loan servicer. The Federal Perkins Loan program allowed schools to make loans to students at a relatively low interest rate. These low-interest loans were made on the basis of need but have been discontinued by the U.S. Department of Education. The last disbursements were made on June 30, 2018. Unsubsidized Stafford loans - For undergraduate and graduate or professional students; the borrower is responsible for interest during all periods; a student must be enrolled at least half-time; financial need is not required.For undergraduate students: Interest rates for new Direct Unsubsidized Loans canchange every year. Loans made to undergraduate students during the 2018–19award year have the rate fixed at 5.05% for the life of the loan.For graduate or professional students: Interest rates for new Direct UnsubsidizedLoans can change every year. Loans made to graduate or professional studentsduring the 2018–19 award year have the rate fixed at 6.6% for the life of the loan. Up to $20,500 (less any subsidized amounts received for same period), depending on grade level and dependency status.
How long do patients have in a skill nursing benefit period before they must pay the remaining cost?
100 days You pay: Days 1–20: $0 for each benefit period . Days 21–100: $170.50 coinsurance per day of each benefit period. Days 101 and beyond: all costs Your doctor or other health care provider may recommend you get services more often than Medicare covers. Or, they may recommend services that Medicare doesn’t cover. If this happens, you may have to pay some or all of the costs. Ask questions so you understand why your doctor is recommending certain services and whether Medicare will pay for them.
How many days does the skilled nursing facility pay for the entire cost of the patient’s stay?
the skilled nursing facility pays the entire cost of the patient’s stay in a skilled nursing facility for only the first 20 days after certain conditions are met Medicare
Part A (Hospital Insurance) covers skilled nursing care provided in a SNF in certain conditions for a limited time (on a short-term basis) if all of these conditions are met:
- You have Part A and have days left in your benefit period to use.
- You have a qualifying hospital stay.
- Your doctor has decided that you need daily skilled care.
- It must be given by, or under the supervision of, skilled nursing or therapy staff.
- You get these skilled services in an SNF that’s certified by Medicare.
- You need these skilled services for a medical condition that’s either:
- A hospital-related medical condition.
- A condition that started while you were getting care in the skilled nursing facility for a hospital-related medical condition .
Your costs in Original Medicare You pay:
- Days 1–20: $0 for each benefit period .
- Days 21–100: $170.50 coinsurance per day of each benefit period.
- Days 101 and beyond: all costs.
What it is Skilled care is nursing and therapy care that can only be safely and effectively performed by, or under the supervision of, professionals or technical personnel. It’s health care given when you need skilled nursing or skilled therapy to treat, manage, and observe your condition, and evaluate your care. Medicare-covered services include, but aren’t limited to:
- Semi-private room (a room you share with other patients)
- Meals
- Skilled nursing care
- Physical therapy (if needed to meet your health goal)
- Occupational therapy (if needed to meet your health goal)
- Speech-language pathology services (if they’re needed to meet your health goal)
- Medical social services
- Medications
- Medical supplies and equipment used in the facility
- Ambulance transportation (when other transportation endangers health) to the nearest supplier of needed services that aren’t available at the SNF
- Dietary counseling
- Swing bed services
Kevin wishes to purchase a yacht in 20 years when he retires. If the yacht currently costs $450,000 and inflation is 2% annually, how much should he deposit at the beginning of each year to have enough to purchase the yacht at the end of 20 years? Assume that Kevin will earn an average compounded after-tax annual return of 5% on his investments.
Pay attention it says beginning of year!
Part 1 = Find the Future Value based on Inflation
- N = 20
- PV = 450,000
- I = 2
- PMT = 0
- FV?
- FV = $668,676
Part 2 =
- FV = $668,676
- N = 20
- I = 5%
- PV = 0
- PMT = ?
- PMT = $19,260
NOTE - First figure out what the current cost will be as adjusted for inflation. Then find the payment to get there.
Do tax payers get an exemption for giving financial support to a non US citizen?
HELL NO Exemptions are no longer availabe.
How much of a rental real estate loss can a taxpayer deduct and what are the rules?
25K Rental Loss allowed against Ordinary Income
THREE Requirements:
- 10%,
- Active, and
- Not Phased Out
- (100K - 150K; same for all filers except married filing separately)
- If MAGI is between $100k and $150k then you can only deduct 50% of the difference between there (i.e. for every 2 dollars of income, you lose a dollar of the deduction)
- (MAGI is $120 then can deduct $15k or 50% of $150k - $120k).
Active Participation:
- Active participation is a less stringent requirement than material participation
- You may be treated as actively participating if, for example, you participated in making management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense
- Management Decisions:
- Approving new tenants,
- Deciding on rental terms,
- Approving capital or repair expenditures, and
- Other similar decisions.
What is a 2-6 year graduated vesting schedule?
Your Matching Contribution Account is subject to a 2-6 year graded vesting schedule (20% per year starting with two years of vesting service).
- 20% vested after 2 years
- 20% each of the following years
- Year 3 = 20%
- Year 4 = 20%
- Year 5 = 20%
- Year 6 = 20%
Cliff Vesting - This usually occurs after one to three years of employment. Example:
- Year 1 = 0%
- Year 2 = 0%
- Year 3 = 100%
Though cliff vesting and graded vesting are the typical vesting schemes, there are two exceptions to the rule.
All employees must be 100% by the time:
- All employees attain normal retirement age under the plan, or
- When the retirement plan is terminated by the employer
NOTE = You don’t have to be concerned about your 401(k) vesting schedule when you make a contribution to your 401(k) plan. But the same isn’t true when it comes to your employer’s matching contributions
What is the minimum vesting requirement for a defined contribution plan?
3 year cliff (100% on year 3) or 2-6 year graduated (20% on year 2 and 20% each year until year 6) Qualified defined contribution plans (for example, profit-sharing or 401(k) plans) can offer a variety of different vesting schedules that are determined by the plan document. These can range from immediate vesting, to 100% vesting after 3 years of service (as defined by the plan, generally 1,000 hours worked over 12 months), to a vesting schedule that increases the employee’s vested percentage for each year of service with the employer. This sounds easy enough, but it can get complicated. Employers can choose to use different methods of counting service. Different vesting requirements apply to employer contributions depending on the type of plan the employer sponsors. SEP, SARSEP, and SIMPLE IRA (and other IRA-based) plans require that all contributions to the plan are always 100% vested.
Constant Growth Dividend Model (Intrinsic Value of Stock)
How do you compare the current price of the stock vs the price determined by the Constant Growth Dividend Model?
How do you determine the Required Date of Return (RRR)?
P = D1 / r-g
Price of Stock = Estimated Dividend for Next Period / (Required Rate of Return - Growth Rate)
The dividend growth model determines if a stock is overvalued or undervalued assuming that the firm’s expected dividends grow at a value g forever, which is subtracted from the required rate of return (RRR) or k. Dividend Growth Rate cannot be higher than the RRR because that results in a negative in the denominator and the
EXAMPLE:
Let’s assume XYZ Company intends to pay a $1 dividend per share next year and you expect this to increase by 5% per year thereafter. Let’s further assume your required rate of return on XYZ Company stock is 10%. Currently, XYZ Company stock is trading at $10 per share.
- P = 10
- D1 = 1.00
- Required Rate of Return = 10%
- Growth rate = 5%
Using the formula above, we can calculate that the intrinsic value of one share of XYZ Company stock is:
- P = $1.00/(.10-.05) = $20
- ANSWER = Based on the dividend growth model, the company is overvalued.
Required Rate of Return= Two ways to determine:
FIRST = CAPM
- Expected Rate of Return = Risk- Free Rate + Beta of Stock(Return of Market - Risk-Free Rate)
- NOTE = Investors expect to be compensated for risk and the time value of money.
- You may find the required rate of return by using the capital asset pricing model (CAPM), which requires certain inputs including:
- The risk-free rate (RFR)
- YTM of a 10-year Treasury Bill
- The stock’s beta coefficient
- Covariance of Stock and Market / Variance of Market
- Basically = How sensitive or volatile is the stock’s price movement with respect to the market or the benchmark
- The expected market return
- For most calculations, the expected market return rate is based on the historic return rate of an index such as the S&P 500, the Dow Jones Industrial Average, or DJIA, or the Nasdaq.
- The risk-free rate (RFR)
Second = Cost of Equity
- Cost of Equity = (Next Year’s Annual Dividend / Current Stock Price) + Dividend Growth Rate
HCE Ratio Test
A Highly Compensated Employee (HCE) is defined as an employee that
- owns more than 5% of the company or
- received at least $120,000 in compensation for the previous two years.
The amount of compensation used for determination may be adjusted each year depending on inflation. Coverage testing is established to ensure that each plan is covering enough of the NHCEs. Sounds pretty simple, right? While the underlying concept is easy to understand, the calculations can be a bit more confusing.
The test compares the percent of benefiting NHCEs to the percent of benefiting HCEs in a plan. The magic number to keep in mind is 70%.
(NHC Benefit / Total NHC) / (HCE Benefit / Total HCE ) Has to be greater than or equal to 70% to past test The purpose of the test is to make sure a given plan covers enough non-highly compensated employees. That sounds straightforward enough, but some of those terms are loaded. We will get into more detail below, but the magic number to keep in mind when it comes to the minimum coverage test is 70%.
Each contribution type is considered a separate “plan.” In other words, if a plan offers
- 401(k) deferrals,
- a company match and
- company profit sharing contributions,
the minimum coverage test must be applied three times — once for each type of contribution.
This is to ensure a plan is not designed to cover everyone in the employee-funded 401(k) portion while covering only the owners and officers in the company-funded profit sharing contribution.
EXAMPLE - Let’s take a look at company X again for an example of how the testing is done. Due to specific exclusions of employee classifications in the plan, only 5 of the 9 Non-HCEs are eligible to participate and 2 of the 3 HCEs are eligible. The calculations would go like this:
- 5 / 9 = 55.6%
- 2 / 3 = 66.7%
- 55.6% / 66.7% = 83.3%
Since the ratio that compares NHCEs to HCEs is greater than 70%, Company X has passed the testing. But, if there was not an exclusion for any HCEs, then Company X would have failed coverage. Coverage testing is slightly different from the other tests in that all plans must satisfy the requirements regardless of Safe Harbor status.
How does the Test Work Example: ABCCompany has 35 employers, but only 25 have met the age and service requirements. So those 25 making up the testing group. There are 5 HCEs and 20 non-HCEs The plan excludes salespeople, and the testing group includes 3 salespeople, 1 of which is an HCE. Benefitting NHCEs = 18 Benefitting HCEs = 4 TOTAL Benefitting Employees = 22 TOTAL NHCES = 20 Not Benefitting NHCEs = 2 Not Benefitting HCEs = 1 TOTAL Not Benefitting Employees = 3 TOTAL HCEs = 5
Example Non-HCE Ratio 18 / 20 = .9% HCE Ratio 4 / 5 = .8% Ratio Percentage .9% / .8% = 112.5% Since the plan’s ratio percentage is 70% or greater, this plan passes the minimum coverage test. The first step is to identify which employees must be considered. This generally includes not only the employees of the company sponsoring the plan but also the employees of any companies that are related to the plan sponsor Step two is to apply the plan’s eligibility requirements. So, if a plan requires an employee to be at least age 21 and complete one year of service to join the plan, anyone not meeting those criteria is set aside for purposes of the test. We will refer to those who are left as the testing group Next, we divide the testing group into four subsets: (1) Highly compensated employees (HCEs) who benefit, (2) HCEs who do not benefit, (3) Non-HCEs who benefit, and (4) Non-HCEs who do not benefit
What type of retirement plan is best to use when there are fluctuating cash flows in the business? What is the Maximum Contribution Amounts?
Profit sharing plan. With a profit sharing plan, contributions from the employer are discretionary. Four initial steps for setting up a profit-sharing plan: (i) Adopt a written plan document, If you do make contributions, you will need to have a set formula for determining how the contributions are divided. This money goes into a separate account for each employee. (ii) Arrange a trust for the plan’s assets, (iii) Develop a recordkeeping system, and (iv) Provide plan information to eligible employees. EMPLOYER ONLY CONTRIBUTIONS Profit-sharing plans allow for employer contributions only. In the event that a salary deferral feature is added to a profit-sharing plan, it would then be defined as a “401(k) plan.” While there is no set amount that must be contributed to a profit-sharing plan each year, there is a maximum amount that can be contributed to a profit-sharing plan for each employee. The amount fluctuates over time with inflation. The maximum contribution amount for a profit sharing plan is the lesser of 25% of compensation or $56,000 ($62,000 including catch-up contributions) in 2019. Flexibile contributions – contributions are strictly discretionary Good plan if cash flow is an issue Administrative costs may be higher than under more basic arrangements (SEP or SIMPLE IRA plans) Need to test that benefits do not discriminate in favor of the highly compensated employees. EXAMPLE One common method for determining each participant’s allocation in a profit-sharing plan is the “comp-to-comp” method. Under this method, the employer calculates the sum of all of its employees’ compensation (the total “comp”). To determine each employee’s allocation of the employer’s contribution, you divide the employee’s compensation (employee “comp”) by the total comp. You then multiply each employee’s fraction by the amount of the employer contribution. Using this method will get you each employee’s share of the employer contribution.