TAX 9900 Lecture Notes - Lecture 66: Carried Interest

12 views3 pages

scarletsnail973

21 Apr 2020

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Let"s talk about 2 and 20: compensation methodology for general partners of private equity, hedge fund, real estate funds, structures are intended to maximize capital gains to fund managers. Annual management fee of, for example, 2% plus. Percentage of net profits of the fund (e. g. , 20%: referred to as carried interest , generally, expected to be capital gains, some general partners waive annual fee in exchange for increased carried interest. Could convert entire amount paid to manager to capital gain: all of this, plus capitalization concerns, led to proposed regulations in 2015. Apply any time a partner renders services to a partnership. 707(a)(2)(a), but limited to service providers: facts and circumstances analysis required. List same five factors as legislative history and add a sixth. Most important factor is whether payment of the amount is subject to significant entrepreneurial risk : if not subject to ser, stop and treat as a disguised payment for services.

Related Questions

Question 5

1. Which of the following does not have default risk?

	a.	Money market mutual funds.
	b.	Commercial paper.
	c.	Negotiable certificates of deposit.
	d.	U.S. Treasury bills.

2 points

Question 6

1. The spread is the:

	a.	Difference between the bid and ask prices.
	b.	Commission charged by the broker.
	c.	Difference between the purchase and sale prices.
	d.	Difference between the commissions charged by full-service and discount brokers.

3 points

Question 7

1. Securities regulations protect investors by:

	a.	Requiring disclosures of information by firms.
	b.	Stopping investors from buying overpriced stock.
	c.	Reducing competition among brokers.
	d.	Establishing commission schedules.

3 points

Question 8

1. If a stock is bought on margin:

	a.	The full amount of the cost of the investment is borrowed.
	b.	The commissions on the investment are increased.
	c.	The cost of the investment is reduced.
	d.	The interest on the borrowed funds is set by the SEC.

3 points

Question 9

1. Sarbanes-Oxley, the latest important securities law:

	a.	Reduces potential conflicts between securities analysts and investment bankers.
	b.	Legalizes the sale of securities by investment brokers.
	c.	Requires corporate boards of directors to own stock.
	d.	Mandates that security analysts file their recommendations with the SEC.

2 points

Question 10

1. Which of the following are true about the present value of a dollar?

1. It increases as the interest rate increases.

2. It decreases as the interest rate increases.

3. It increases as the time period increases.

4. It decreases as the time period increases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 11

1. Time value concepts may not be used to determine:

	a.	The present value of an annuity.
	b.	The margin required on a stock purchase.
	c.	The future value of $100 deposited in a bank.
	d.	The present value of a lump sum.

2 points

Question 12

1. What is the marginal tax rate?

	a.	The tax rate paid on investment gains from items purchased on margin.
	b.	The tax rate paid on an additional dollar of taxable income.
	c.	The margin required on a stock purchase.
	d.	The present value of a lump sum.

2 points

Question 13

1. Examples of capital gains include sales of which of the following?

1. IRA accounts.

2. Stocks sold for a profit.

3. Real estate sold for a profit.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 14

1. With a Roth IRA, the individual:

	a.	May deduct annual contributions.
	b.	Earns tax-free income.
	c.	Defers taxes.
	d.	Avoids estate taxes.

2 points

Question 15

1. Sources of unsystematic risk include which of the following?

1. A firms financing decisions.

2. A firms operations.

3. Fluctuating market prices.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

2 points

Question 16

1. For diversification to reduce risk:

	a.	The returns on the individual securities should be highly correlated.
	b.	The prices of the stocks should be stable.
	c.	The returns on the individual securities should be negatively correlated.
	d.	One firm should offer dividends and the other should offer capital gains.

2 points

Question 17

1. Which of the following are true about beta coefficients?

1. They are a measure of systematic risk.

2. They relate the return on an individual security to the return on the market.

3. They measure the variability of an assets return.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 18

1. Which of the following does an efficient portfolio do?

1. Maximizes risk for a given return.

2. Minimizes risk for a given return.

3. Maximizes return for a given level of risk.

4. Minimizes return for a given level of risk.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 19

1. The security market line does not:

	a.	Indicate the relationship between risk and return.
	b.	Relate the market return and beta to a stock's return.
	c.	Identify the optimal portfolio for the investor.
	d.	Use beta coefficients as a measure of risk.

3 points

Question 20

1. Mutual funds ____ realized capital gains and income (for example, dividends received):

	a.	Retain.
	b.	Reinvest.
	c.	Distribute.
	d.	Distribute or reinvest.

2 points

Question 21

1. An index fund limits its portfolio to:

	a.	High quality securities.
	b.	Stocks that respond to changes in the consumer price index.
	c.	Stocks included in an aggregate measure of stock prices.
	d.	Stocks of firms in a particular industry.

2 points

Question 22

1. Mutual funds with beta coefficients greater than 1.0:

	a.	Have outperformed the market.
	b.	Have underperformed the market.
	c.	Have more systematic risk than the market.
	d.	Have less systematic risk than the market.

3 points

Question 23

1. Which of the following will tend to cause a stock's price to fall?

1. The firms beta declines.

2. The firms beta increases.

3. The risk-free rate declines.

4. The risk-free rate increases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 24

1. The use of P/E ratios to select stocks suggests that:

	a.	High P/E stocks should be purchased.
	b.	Low P/E ratio stocks are overvalued.
	c.	A stock should be purchased if it is selling near its historic low P/E.
	d.	A stock should be purchased if it is selling near its historic high P/E.

2 points

Question 25

1. What does the efficient market hypothesis require?

1. Financial markets to be competitive.

2. Prices to adjust rapidly.

3. Prices of undervalued securities to fall.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 26

1. Which of the following does the strong form of the efficient market hypothesis suggest?

1. Inside information will not lead to superior investment results.

2. Inside information will lead to superior investment results.

3. Studying financial statements will not lead to superior investment results.

4. Studying financial statements will lead to superior investment results.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 27

1. Which of the following is the least broad-based measure of stock prices?

	a.	NASDAQ market index.
	b.	Dow Jones industrial average.
	c.	S&P 500 stock index.
	d.	AMEX market value index.

3 points

Question 28

1. What is dollar-cost averaging?

	a.	Periodically buying a round lot of stock.
	b.	Periodically investing a specified dollar amount in a stock.
	c.	A means to increase the average cost basis.
	d.	A means to ensure a positive return.

2 points

Question 29

1. Stock dividends cause:

	a.	The price of a share of stock to rise.
	b.	The price of a share of stock to fall.
	c.	The value of the firm to rise.
	d.	The value of the firm to fall.

2 points

Question 30

1. Which of the following occurs when a stock has a two-for-one split?

	a.	The price of the stock doubles.
	b.	The firm's assets increase.
	c.	The firm's liabilities decrease.
	d.	The par value of the stock is reduced.

3 points

Question 31

1. Dividend reinvestment plans offer which of the following advantages?

1. Deferment of federal income taxes.

2. A convenient means to accumulate shares.

3. Dollar-cost averaging.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	2.

3 points

Question 32

1. When the Federal Reserve seeks to expand the money supply, it:

	a.	Sells securities.
	b.	Buy securities.
	c.	Runs a deficit.
	d.	Runs a surplus.

2 points

Question 33

1. The sum of cash, currency, and demand deposits is:

	a.	M1.
	b.	M2.
	c.	M3.
	d.	M4.

3 points

Question 34

1. If the Federal Reserve lowers the target federal funds rate:

	a.	The discount rate rises.
	b.	Liquidity in the banking system is increased.
	c.	Security prices fall.
	d.	Required reserves are also decreased.

3 points

Question 35

1. The anticipation of inflation suggests that the investor should:

	a.	Buy bonds.
	b.	Anticipate higher interest rates.
	c.	Avoid real estate investments.
	d.	Sell stocks of gold companies.

3 points

Question 36

1. The current ratio is unaffected by:

	a.	Using cash to pay a dividend.
	b.	The collection of an account receivable.
	c.	Selling inventory for a profit.
	d.	Selling bonds and using the funds to finance inventory.

2 points

Question 37

1. Which of the following are true as the debt ratio increases?

1. Fewer assets are debt financed.

2. More assets are debt financed.

3. The ratio of debt equity increases.

4. The ratio of debt equity decreases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 38

1. The technical approach suggests that future stock prices are forecasted by:

	a.	Past stock rates.
	b.	Financial ratios.
	c.	Accounting statements.
	d.	Monetary policy.

2 points

Question 39

1. The Dogs of the Dow strategy:

	a.	Forecasts the direction of the Dow Jones averages.
	b.	Suggests buying the Dow stocks with the highest dividend yields.
	c.	Outperforms the S&P 500.
	d.	Suggests buying the lowest-priced Dow stocks.

3 points

Question 40

1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?

	a.	Accounting and finance.
	b.	Finance and psychology.
	c.	Physics and finance.
	d.	Finance and marketing.

ochrewalrus157

Stuyvesant Town is a sprawling collection of red brick apartment buildings with typical housing project style architecture, stretching from First Avenue to Avenue C between 14th and 23rd Streets in Manhattan. Stuyvesant Town has 8,750 apartments in 35 residential buildings. The surroundings of Stuyvesant Town are bordered by the East River on the east, the Gramercy neighborhood on the west, the East Village to the south, and Kips Bay to the north. The surrounding area to the west is notable for its historic Stuyvesant Square, a two block park surrounded by the old Stuyvesant High School, Saint Georgeâs Church and the Beth Israel Medical Center. Since opening its doors in 1947 this has been a highly desirable place to live due to its location, surroundings, and family friendly neighborhood. Currently the apartments rent for the following: 1,500 1-Bedroom Units Renting @ $2500/month 2,500 2-Bedroom Units Renting @ $4250/month 4,000 3-Bedroom Units Renting @ $5800/month 750 5-Bedroom Units Renting @ $7500/month Additionally, this property has covered parking, a recreation facility, and other non-real estate revenue equal to 3.5% of the Potential Gross Rent. While this is a highly desirable place to live with a waiting list during most years there are times when apartments are empty while renovations occur. The vacancy expense is 2% of Potential Gross Income plus Other Income and Operating Expenses are typically 39% of Effective Gross Income. Your partnership is unable to lock down a favorable loan with the best rate having the following terms 55% LTV, 6.0% Interest Rate, 20-yrs, 10-yr Balloon Mortgage, 2.0 Pts, $1,000,000 in Fees. Unfortunately due to the strict loan terms you will need a second and third loan to buy this property as you feel ill-equipped for the necessary down payment. Due to the higher risk nature of this second loan the terms are even less favorable. For your second mortgage you will receive 15% LTV, 7.25% Interest Rate, 10-yrs, 2.0 Pts, $500,000 in Fees. And your third mortgage will come at 10% LTV, 8.5% Interest Rate, 10-yrs, 3.0 Pts, $300,000 in Fees. General Market Terms for DCR = 1.33, EDR = 6.5%, BV/TV = 0.4 still apply. Despite inflation being quite low currently the partners ask you to model inflation at 3% for all 10-years. Also, due to the standard of living Stuyvesant provides to those that live within this oasis in Manhattan appreciation is expected to be equal to the inflation rate. This investment on behalf of the partnership is expected to last 10 years at which time the market for housing is expected to be robust and the partnership will then sell the investment and invest the profits elsewhere. The sales expense at that time is expected to be 1.5%. However, despite the return to a ânormalâ real estate market the partnership will most likely accept an offer at 3% less than the full value of the property. Calculate and show the Annual Cash Flows, Taxes (utilize and show both methods), IRR & NPV for your Partnership (Round all dollar answers to the nearest dollar, use 20% for the capital gains tax, use 25% for depreciation recapture tax rate, the head of household tax bracket for the tax rates and assume that losses cannot be carried forward). Would you make these loans to the partnership? Make sure to comment on why or why not. In addition, calculate a Potential ROE/Leverage Chart for the first year as computed in class based on 0%, 55%, 70%, and 80% Leverage to illustrate whether this is (1) positive financial leverage, (2) negative financial leverage, or (3) neutral financial leverage and explain why.

jadecheetah447

TAX 9900 Lecture Notes - Lecture 66: Carried Interest

Document Summary

Get access

Related Documents

FIN 101 Study Guide - Quiz Guide: Preferred Stock, Federal Supplement, S&P 500 Index

FINC3022 Final: Alternative Investments (FINC3022) Final Exam Notes

FNCE 251 Lecture Notes - Lecture 4: Sungard, High-Yield Debt, Investment Banking

Related Questions