Lesson 2.4 Stock Dividends and Stock Splits

Stock dividends

Under these circumstances, the company issues additional shares of its common stock as a dividend to its current stockholders instead of cash.

Stock Splits

A stock split occurs when a company divides each existing share of its stock into several new shares.

A forward stock split

• the number of shares will increase and the price per share will decrease without affecting the total market value of shares outstanding.

• the cost basis per share (for tax purposes) will decrease as well.

A forward split can be characterized as

even split or an uneven split

Forward even split: math formula to find the new number of shares assume 2:1 split
An investor owns 100 shares at $60 per share = 6000

• multiply the #of shares own by 2, 100×2=200

• then divide by 1, 200/1= 200

the investor will receive an additional 100 shares from the split for a total of 200 shares.

Determine the new per share value:

• the total value of the position) / (the total post-split shares)
  6000 / 200= 30 The new per share value

the investor now owns 200 shares at $30 per share.

Forward Uneven Split: An investor owns 100 shares at $60 per share= $6,000. Assume a 5:4 split

• multiply the original number by 5, 100×5= 500

• then divide by 4, 500/4 = 125

Determine the new per share value as follows:

• $6,000 / 125 = $48. The new per share value is $48.

Cost basis

the total aggregate cost basis remains unchanged, but the cost bases per share will decrease

Reverse stock split

the number of shares decreases while the price per share increases. The cost basis per share will likewise increase. The total value of the position is unchanged by the split.

reverse split

An investor owns 100 shares at $5 per share. Therefore, the total position value is $500 (100 × $5 = $500). Assume a 1:4 reverse split. What is the new number and value of shares?

100 × 1 = 100; 100 / 4 = 25. The new number of shares is 25. $500 / 25 = $20. The new per share value is $20.

After the adjustment for the 1:4 corporate split action, the investor now owns 25 shares at $20 per share. An uneven reverse split follows the same pattern, but they are not tested.

Are Dividends part of the calculation for gain or loss.

NO

Joshua Ryan bought 100 shares of XYZ at $60 per share. Joshua sold the shares at $40 per share after a 2:1 stock split. How much gain or loss did he incur per share for tax purposes?

The formula to calculate a gain or loss for tax purposes is the proceeds minus the cost basis. He bought the shares for $60, and then there was a 2:1 split so the cost basis was adjusted to $30 per share. He sold at $40 so he had a $10 gain.

The price of a certain stock has diminished over the last several months to the point where it may be delisted by the exchange where it trades. An action the issuer could take in this case would be

reverse split.

The issuer would wish to increase the per share price of the stock to prevent delisting, which lowers the number of shares but increases the price per share.

how to calculate cost basis

An investor purchased 100 shares of MJS on June 19, 2015 at a price of $40 per share. On June 1, 2016, MJS declared a 25% stock dividend. On July 1, 2016, the investor sold 50 shares of the MJS at $50 per share. Which of these statements is correct?

original total cost 100×40 ($4,000) divided by the new number of shares. 100 × .25 = 25 additional shares for a total of 125. $4000 / 125 shares equals a new cost basis per share of $32.