Question

Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

An investor holds $1,200$ shares of Apex Logistics common stock with an adjusted cost basis of $\$3.50$ per share. The corporation executes a 1-for-4 reverse stock split. What is the investor's new cost basis per share (in dollars) following the completion of this corporate action?

Answer: 14 $

Answer

The new cost basis is $14.00 per share.

In a reverse stock split, the number of outstanding shares decreases and the price per share increases proportionally so that the total dollar value of the position remains constant. For a 1-for-4 reverse split, the share count is divided by 4 (

1,200 \rightarrow 300

) and the cost basis per share is multiplied by 4 (

\$3.50 \times 4 = \$14.00

).

Step-by-Step Solution

1

Calculate the total cost basis of the original position

1,200 \text{ shares} \times \$3.50/\text{share} = \$4,200.00

Corporate actions do not alter the overall economic dollar value or total cost basis of an investor's holding.

2

Calculate the post-split number of shares

1,200 \text{ shares} \times \frac{1}{4} = 300 \text{ shares}

A 1-for-4 reverse split consolidates every 4 existing shares into 1 new share.

3

Calculate the new cost basis per share

\frac{\$4,200.00}{300 \text{ shares}} = \$14.00 \text{ per share}

Dividing the unchanged total cost basis by the reduced share count yields the post-split cost basis per share.

Key Concept

Cost Basis Adjustment for Reverse Stock Splits

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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions