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Question

Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

An investor holds 400400 shares of Meridian Health Inc. common stock with an initial cost basis of $45.00\$45.00 per share. The company's board of directors declares a 55-for-44 forward stock split. What is the investor's adjusted cost basis per share immediately following the stock split?

Answer: 36 $

Answer

The investor's adjusted cost basis per share following the 5-for-4 forward stock split is $36.00.
In a forward stock split, the investor receives additional shares while their total cost basis in the position remains unchanged (18,000).Fora5−for−4split,theinvestorreceives5sharesforevery4previouslyowned,resultingin500shares(18,000). For a 5-for-4 split, the investor receives 5 shares for every 4 previously owned, resulting in 500 shares ( 400 \times 5/4 ).Dividingthetotalcostbasisof). Dividing the total cost basis of 18,000 by 500 shares yields an adjusted cost basis of $36.00 per share.

Step-by-Step Solution

1
Calculate the total initial investment (total cost basis).
400 shares × 45.00=45.00 = 18,000.
A stock split changes the number of shares held and the per-share value/basis, but the total position value remains constant.
2
Calculate the total number of shares held after the forward split.
400 shares × (5 / 4) = 500 shares.
A 5-for-4 forward stock split increases the share count by 25% (or a ratio of 5 to 4).
3
Determine the adjusted cost basis per share.
18,000totalbasis/500shares=18,000 total basis / 500 shares = 36.00 per share.
Dividing the unchanged overall dollar investment by the increased quantity of shares provides the lower cost basis per share.

Key Concept

Calculating adjusted position share count and per-share cost basis after a forward stock split
Estimated Time:1m 30s
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions