An investor holds 600 shares of XYZ Corporation common stock in a cash account, purchased … — FINRA SIE (Securities Industry Essentials)

An investor holds $600$ shares of XYZ Corporation common stock in a cash account, purchased at an initial cost basis of $\$45.00$ per share. The issuing corporation declares a $5$ -for- $4$ stock split. Following the execution of this corporate action, what is the investor's adjusted cost basis per share (in dollars)?

Answer: 36 $

Answer

The investor's adjusted cost basis per share after the

5

-for-

4

forward stock split is

\$36.00

The correct adjusted cost basis per share is

\$36.00

. In a

5

-for-

4

forward stock split, the share count increases by a ratio of

5/4

(from

600

750

shares) while the total cost basis remains unchanged at

\$27,000.00

. Dividing the total cost basis by the new share count (

\$27,000.00 / 750

) yields

\$36.00

per share, or multiplying the original price by the inverse of the split ratio (

\$45.00 \times 4 / 5 = \$36.00

Step-by-Step Solution

Calculate the total initial cost basis of the equity position.

The total cost basis is

600 \times \$45.00 = \$27,000.00

A stock split changes the number of outstanding shares and the per-share price, but the total overall monetary value of the investor's position remains unchanged.

Calculate the adjusted total number of shares owned after the split.

The post-split share count is

600 \times \frac{5}{4} = 750

shares.

In a

5

-for-

4

forward split, the investor receives

5

new shares for every

4

shares previously held, increasing the share quantity by

25\%

Determine the adjusted cost basis per share.

The new cost basis per share is

\frac{\$27,000.00}{750} = \$36.00

Dividing the total unchanged cost basis of

\$27,000.00

by the new total of

750

shares provides the lower per-share cost basis.

Key Concept

Corporate Action - Forward Stock Split Adjustments

Estimated Time:1m 0s

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