11
4) Investors can postpone or avoid income taxes by investing through Individual Retirement
Accounts.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
5) Short-term capital gains are taxed at the taxpayer’s marginal tax rate.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
6) To qualify for long-term capital gains rates, a stock must be held for at least 12 months.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
7) Retirement plans, such as a 401(k), allow employees to defer taxes on the plan contributions
until such time as the funds are withdrawn from the retirement plan.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
8) You should spend money on housing, clothing and basic insurance before investing.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
12
9) Which of the following represent investment goals?
I. saving for major expenditures such as a house or education
II. sheltering income from taxes
III. increasing current income
IV. saving funds for retirement
A) I and IV only
B) III and IV only
C) I, III and IV only
D) I,,II, III and IV
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
10) In selecting investments consistent with your goals, you should consider
A) rates of return and taxes only.
B) the pre-tax rate of return only.
C) annual dividends and taxes only.
D) risks, returns, and taxes.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
11) Sarah purchased a stock one year ago at a price of $32 a share. In the past year, she has
received four quarterly dividends of $0.75 each. Today she sold the stock for $38 a share. Her
capital gain per share is
A) $3.00.
B) $6.00.
C) $(6.00).
D) $9.00.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
13
12) A well-conceived investment policy statement will specify
A) the investor’s current age and economic situation.
B) the investor’s preference for frequent or infrequent trading.
C) the types of investments the investor is willing to consider.
D) all of the above.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 4
13) Beginning investors with small amounts to invest should
A) avoid stock investments completely.
B) invest all of their money in one high quality stock.
C) buy mutual funds or exchange traded funds (ETFs).
D) buy a portfolio of very low priced stocks (penny stocks).
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
14) Research indicates that investors who closely monitor their portfolios and trade quickly in
response to minor fluctuations in price
A) outperform those who hold investments for the long-term and trade infrequently.
B) underperform those who hold investments for the long-term and trade infrequently.
C) earn rates of return similar to those who hold investments for the long-term and trade
infrequently.
D) be more highly educated and in higher income brackets than those who hold investments for
the long term and trade infrequently.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 4
14
Table 1.2
Use the following tax rates and income brackets for 2015 to answer the following question(s).
15) In 2015, John and Nicole earned a combined taxable income of $148,800 from employment
plus $1,000 in long term capital gains and they file a joint tax return. What is their total federal
income tax? Round to the nearest dollar.
A) $37,150
B) $29,063
C) $29,593
D) $28,963
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 4
16) Josh earned $82,500 in taxable income, all from wages and interest, and files an individual
tax return. What is the amount of Josh’s taxes for the year 2015? Round to the nearest dollar.
A) $13,750
B) $16,481
C) $18,425
D) $12,285
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 4
15
17) For a taxpayer in the 25% marginal tax bracket, a long-term capital gain realized in 2015
will be taxed at
A) 5%.
B) 10%.
C) 15%.
D) 25%.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 4
18) Andrew and Jennifer are in the 25% marginal tax bracket. Three years ago they purchased
100 shares of stock at $20 a share. In 2015, they sold the 100 shares for $29 a share. What is
the amount of federal income tax they owe as a result of this sale?
A) $135
B) $165
C) $225
D) $435
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 4
19) Michelle and Patrick are in the 28% marginal tax bracket. They bought 100 shares of DJN
stock at $45 per share and sold them 4 years later in 2015 at $22 per share? By how much did
their loss reduce their taxes in the year when they sold the stock?
A) $0
B) $644
C) $345
D) $1,260
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 4
16
20) Under current tax law, dividend income is taxed at the same rate as
A) ordinary income.
B) short-term capital gains.
C) long-term capital gains.
D) interest income.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
21) Both the holding period to qualify and the tax rate on long-term capital gains
A) are subject to political pressure and occasionally change.
B) are very stable and have not changed since the 1960s.
C) are phased out on incomes over $388,351.
D) are adjusted for inflation every year.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
22) Tax planning
A) guides investment activities to maximize after-tax returns over the long term for an
acceptable level of risk.
B) ignores the source of income and concentrates solely on the amount of income.
C) is primarily done by individuals with incomes below $200,000.
D) is limited to reviewing income for the current year and determining how to minimize current
taxes.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
17
23) Speculative and growth oriented investments are least appropriate for
A) young investors.
B) middle-aged investors.
C) retired investors.
D) high income investors.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
24) Investors seeking to increase their wealth as quickly as possible would invest in
A) corporate bonds and preferred stock.
B) large company stocks with high dividends.
C) smaller companies pursuing rapid growth.
D) government bonds and low-risk income stocks.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
25) Discuss the relationship between stock prices and investors’ beliefs about the business
cycle.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
18
26) What are some of the important prerequisites to investing?
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4
27) Discuss the general investment philosophy and the types of investments preferred by
investors in each phase of the life cycle.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 4