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Difficulty: HardSettlement Dates, Trade Confirmations, and Corporate Actions

An investor purchases 400 shares of XYZ Corporation common stock at $55.00 per share in a cash account. Subsequently, the corporation executes a 5-for-4 stock split, and later in the same year pays a 10% stock dividend. Assuming no other transactions or cash liquidations occur, what is the investor's adjusted cost basis per share (in USD) after both corporate actions are completed?

Answer: 40 USD

Answer

The investor's adjusted cost basis per share is $40.00.
The total cost basis of the holding remains unchanged at 22,000(22,000 ( 400 \text{ shares} \times \55.0055.00). The 5-for-4 split increases the share count from 400 to 500 shares (400×1.25400 \times 1.25). The subsequent 10% stock dividend adds another 10% to the 500-share position, yielding 550 total shares (500×1.10500 \times 1.10). Dividing the unchanged 22,000totalcostbasisby550sharesproducesanadjustedcostbasisof22,000 total cost basis by 550 shares produces an adjusted cost basis of 40.00 per share.

Step-by-Step Solution

1
Calculate the total initial cost basis of the stock position.
Total cost basis is 400 shares×$55.00=$22,000400 \text{ shares} \times \$55.00 = \$22,000.
Stock splits and stock dividends alter the number of outstanding shares and per-share price, but do not change the total economic cost basis of the position.
2
Adjust the share quantity for the 5-for-4 forward stock split.
Share count becomes 400×(54)=500400 \times \left(\frac{5}{4}\right) = 500 shares.
A 5-for-4 split increases share count by a factor of 1.25 (or 125%).
3
Adjust the share quantity for the subsequent 10% stock dividend.
Final share count becomes 500×(1+0.10)=550500 \times (1 + 0.10) = 550 shares.
The 10% stock dividend applies to the current post-split balance of 500 shares.
4
Compute the updated per-share cost basis.
\frac{\$22,000}{550 \text{ shares}} = \$40.00 \text{ per share}.
Dividing the total position cost by the updated final share count gives the new cost basis per share.

Key Concept

Adjusting Position Cost Basis for Multiple Corporate Actions (Stock Splits and Stock Dividends)
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions