Julian, Berta, and Maria Own 400 Shares, 400 Shares, and 200

question 159

Multiple Choice

Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000) . Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock for $420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel's board of directors after the redemption. With respect to the redemption:

• A) Dividend income of $340,000.
• B) Dividend income of $420,000.
• C) Long-term capital gain of $340,000.
• D) Long-term capital gain of $420,000.
• E) None of the above.

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Definitions:

Risk-Free Asset

An investment with a guaranteed return and no possibility of default, typically associated with government bonds.

Market Return

The total gain or loss on an investment over a specified period, including dividends and capital gains.

Systematic Risk

It represents the risk inherent to the entire market or market segment, often influenced by factors such as economic, political, or social changes.

Treasury Bills

Short-term government securities issued at a discount from the par value and paying no interest, maturing in one year or less, representing a secure, liquid investment.