Case 7

The Gabriel and Sarah Cantrell Case

Case Questions

1.How much total Section 79 income (rounded) for the year must the Cantrells report for tax purposes?

a.$0

b.$6

c.$29

d.$32

e.$35

2.Which of the following is true?

a.Interest earned by the Cantrells adds to their level of discretionary cash flow.

b.Section 79 income earned by the Cantrells adds to their level of discretionary cash flow.

c.Contributions to Gabes 401(k) plan reduce discretionary cash flow.

d.All of the above are true.

e.Only statements a and b are true.

3.The Cantrells are eligible for which of the following tax credits?

I.Income tax credit.

II.Child and dependent care tax credit.

III.Child tax credit.

IV.Low-income housing tax credit.

a.I and II only

b.II and III only

c.III and IV only

d.II, III, and IV only

4.The Cantrells current net worth situation can best be described as:

a.A positive $78,356

b.A negative $2,900

c.A positive $116,094

d.A negative $113,194

e.A positive $194,950

5.When completing their federal tax return, the Cantrells should:

a.file married filing separately.

b.claim a deduction from AGI for retirement plan contributions.

c.use the sales tax deduction when calculating the amount claimed (if any) for itemized deductions.

d.claim Anystate income taxes as a tax credit.

6.Which of the following strategies can the Cantrells use to improve their discretionary cash flow situation?

I.Refinance their first mortgage using a fifteen-year loan.

II.Pay off some or all credit card debt with financial assets.

III.Reduce the amount being withheld for federal taxes.

IV.Increase the amount of reinvested interest earned on investments.

a.I and III only

b.II and III only

c.II and IV only

d.II, III, and IV only

7.The Cantrells current level of discretionary cash flow is enough to:

a.fund this years savings need for one childs college education.

b.fund both childrens savings need for college education this year.

c.pay off credit card debts within one year.

d.fund both a and c.

8.Which of the following statements is true?

a.The Cantrells need to save an additional $3,700 per year to meet their retirement goal.

b.The Cantrells will fall short of their retirement goal by more than $1.5 million using their current retirement planning strategy.

c.The Cantrells must reduce their life expectancy in retirement to retire at age sixty-seven.

d.Statements a and c are correct.

e.None of the statements are correct.

9.Which of the following statements is true regarding the Cantrells estate situation?

I.The value of Gabes group life insurance policy will be excluded from his gross estate.

II.The full value of jointly held liabilities can be deducted as an expense from the gross estate at the passing of the first spouse.

III.If Gabe and Sarah establish Section 529 plans for their children by contributing $5,000 to Section 529 plans, the assets held in the accounts will be excluded from Gabes and Sarahs gross estate.

IV.The Cantrells should begin a gifting strategy to reduce their taxable estate.

a.I only

b.III only

c.I and II only

d.II and III only

e.I, III, and IV only

10.All of the following are examples of tax-advantaged education savings alternatives appropriate for use by the Cantrells except:

a.A Section 529 plan.

b.A Coverdell savings plan.

c.EE savings bonds.

d.An immediate annuity.

11.Sarahs grandmother has decided to gift Gabe and Sarah $150,000. Which of the following strategies can the Cantrells fund with this gift?

I.Fully prefund each childs college education costs.

II.Earmark the gift as a source of emergency funds.

III.Use the gift to fully offset Gabes need for additional life insurance.

a.I only

b.III only

c.I and II only

d.II and III only

12.Rank the following mutual funds in terms of total portfolio risk (volatility), highest to lowest:

I.Maxi Fund

II.Software Fund

III.Image Fund

IV.Clinical Fund

a.I, II, IV, and III

b.I, II, III, and IV

c.II, I, IV, and III

d.II, I, III, and IV

13.Which mutual funds expected rate of return, as measured by CAPM, is the lowest?

a.Super Big Fund

b.Efficacy Fund

c.Image Fund

d.Measures Fund

14.Rank the following mutual funds based on the Sharpe ratio (highest to lowest):

I.Thumb Fund

II.Germain Fund

III.Multivariate Fund

IV.Super Big Fund

a.I, II, IV, and III

b.I, II, III, and IV

c.II, I, IV, and III

d.II, I, III, and IV

15.Rank the following mutual funds based on the Treynor index (highest to lowest):

I.Clinical Fund

II.Image Fund

III.Measures Fund

IV.Thumb Fund

a.I, II, IV, and III

b.I, II, III, and IV

c.II, I, IV, and III

d.II, I, III, and IV

16.Rank the following mutual funds based on the Sharpe ratio (highest to lowest):

I.Germain Fund

II.Image Fund

III.Multivariate Fund

IV.Thumb Fund

a.I, II, IV, and III

b.I, II, III, and IV

c.II, I, IV, and III

d.IV, I, III, and II

17.Rank the following mutual funds based on the Treynor index (highest to lowest):

I.Germain Fund

II.Image Fund

III.Multivariate Fund

IV.Thumb Fund

a.I, II, IV, and III

b.I, II, III, and IV

c.II, IV, I, and III

d.IV, I, III, and II

18.Which of the following mutual funds has the highest alpha?

a.Super Big Fund

b.Thumb Fund

c.Germain Fund

d.Factors Fund

19.Assume that the correlation and standard deviation data for the bond mutual funds are linked to the bond market index. Which bond mutual fund has the highest alpha?

a.Mobile Fund

b.Fast Fund

c.National Fund

d.CDR Fund

20.Which of the following statements is correct?

I.High-yield mutual bond funds are affected by both interest rate changes and changes in the economic performance of the company issuing the bonds.

II.Risk-adjusted performance can best be measured by beta.

III.An investor who wants to rank a list of diversified mutual funds can feel comfortable using the Treynor index.

IV.If an investor wants to rank a list of sector funds, the Treynor index is more appropriate than the Sharpe ratio.

a.II only

b.I and IV only

c.I and III only

d.II and IV only