Private Wealth Management - Reading 17: Low-Basis Stock －

several, dollars, company, hundreds, business

Q1. Greg Groden started his business Groden Corporation 30 years ago. Groden rarely allowed stock splits of his company’s stock, so the price of the stock is now several hundreds of dollars per share. He passed away recently and bequeathed all his shares of Groden Corp. to his 20-year old son. Yasmine Evans, CFA, is the family’s financial advisor, and she sees that Groden Corp. stock makes up over half of the son‘s wealth. Evans is planning to approach the son about selling some of the stock and diversifying. A psychological consideration that Evans should be prepared to address in approaching the son is the:

A) age of the son.

B) high per share price of the stock.

C) fact that the family’s name is on the stock.

Q2. An entrepreneur started a company, which then went public, and the entrepreneur continued to increase both the value of the company and its stock. The entrepreneur openly feels a sense of pride in his accomplishments with the company. A financial advisor approaches the entrepreneur about selling some of the stock to diversify. The entrepreneur says “show me something better” and refuses to sell until the analyst can convince her that another investment has the same potential as the stock in her company. The entrepreneur also asks “what about taxes?” The entrepreneur wants to know how the advisor plans to deal with the consequences of selling a stock with a very low basis. With respect to the responses “show me something better” and “what about taxes?”:

A) neither are to be expected by the advisor.

B) only “what about taxes?” is typical, and the other is never encountered.

C) both are typical and the advisor should expect them.

Q3. An entrepreneur started a company many years ago. The company went public a few years ago, and the entrepreneur continued to increase both the value of the company and its stock. The entrepreneur openly feels a sense of pride in his accomplishments with the company. Based upon this scenario it is likely that a financial advisor suggesting that the entrepreneur sell some of the position in the company with the goal of diversification would:

A) meet a great deal of resistance from the entrepreneur because entrepreneurs are not interested in selling stock for a profit.

B) meet a great deal of resistance from the entrepreneur because of the emotional attachment to the stock.

C) find the entrepreneur very receptive to the idea and eager to earn a profit on the stock.