An investor holds 800 shares of common stock with an initial cost basis of \90.00 per shar… — FINRA SIE (Securities Industry Essentials)

An investor holds $800$ shares of common stock with an initial cost basis of $\$90.00$ per share. The issuing corporation first distributes a $25\%$ stock dividend. Shortly following the stock dividend distribution, the company executes a $1$ -for- $5$ reverse stock split. What is the investor's adjusted cost basis per share (in dollars) after both corporate actions have been processed?

Answer: 360 $

Answer

The investor's adjusted cost basis per share is $360.00.

Stock dividends and reverse stock splits change the total number of shares held without altering the overall aggregate cost basis of the position (

72,000). A 25% stock dividend increases 800 shares to 1,000 shares (

800 \times 1.25

). A subsequent 1-for-5 reverse stock split reduces 1,000 shares down to 200 shares (

1,000 \div 5

). Dividing the aggregate cost basis of

72,000 by 200 shares yields an adjusted per-share cost basis of $360.00.

Step-by-Step Solution

Calculate total initial cost basis of the position

800 \times \$90.00 = \$72,000

Corporate actions adjust the number of shares and per-share price/cost basis, but the total position cost basis remains unchanged.

Adjust total share quantity for the 25% stock dividend

800 \times (1 + 0.25) = 1,000

A 25% stock dividend increases the share count by 25%.

Adjust total share quantity for the 1-for-5 reverse stock split

1,000 \times (1 / 5) = 200

A 1-for-5 reverse split reduces the share count to one-fifth of the pre-split amount.

Compute final per-share cost basis

\$72,000 / 200 = \$360.00

per share

Divide the constant total cost basis ($72,000) by the new final share count (200).

Key Concept

Adjusting position share counts and per-share cost basis across multiple corporate actions while maintaining constant total position value.

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