Stock Split

Anneliese Brockhurst owns 300 shares of a company purchased at $60 per share in a taxable account. The company declares a 3-for-2 stock split. Immediately after the split, Anneliese owns:

1. A.200 shares with a basis of $90 per shareThis applies the ratio backwards, as though the split were 2-for-3.
2. B.450 shares with a basis of $60 per shareThe share count is right but the per-share basis must fall to keep total basis constant.
3. C.900 shares with a basis of $20 per shareThis applies a 3-for-1 ratio rather than 3-for-2.
4. D.450 shares with a basis of $40 per shareCorrect. 300 times 1.5 equals 450 shares, and $60 divided by 1.5 equals $40, leaving total basis at $18,000.

Why: A stock split changes the number of shares and the per-share cost basis but not the investor's total cost basis or total market value. A 3-for-2 split multiplies the share count by 1.5, giving 450 shares, and divides the per-share basis by the same factor, giving $40 per share. Total basis remains $18,000, and a split is not a taxable event.

After a 2-for-1 stock split, 100 shares at 80 become:

1. A.200 shares at 80The share count doubled while the price stayed at 80, which would conjure 8,000 of value into 16,000 out of nothing. Both sides of the ratio have to adjust for the position's value to hold steady.
2. B.200 shares at 40Correct - value unchanged at 8,000.
3. C.100 shares at 40The price was halved but no extra shares were issued, cutting the holding from 8,000 to 4,000. A split never destroys value; it only slices the same value more finely.
4. D.50 shares at 160This applies the ratio in reverse, halving the shares and doubling the price, which describes a 1-for-2 reverse split. A 2-for-1 moves in the opposite direction.

Why: A 2-for-1 split doubles shares and halves price: 200 shares at 40.

Larkmead Instruments effects a 1-for-5 REVERSE stock split. Ottavia Brand owned 1,000 shares bought at $4.00 each, and the stock closed at $4.00 on the day before the split. Ignoring any market reaction to the announcement, immediately after the split her position is:

1. A.200 shares with a cost basis of $4.00 per share and a total market value of about $800The per-share basis and market price must both rise to $20.00. Leaving them at $4.00 destroys 80% of the position out of thin air.
2. B.5,000 shares with a cost basis of $0.80 per share and a total market value of about $4,000This is a 5-for-1 FORWARD split. A reverse split reduces the number of shares outstanding.
3. C.200 shares with a cost basis of $20.00 per share and a total market value of about $4,000Correct. Share count falls fivefold, price and per-share basis rise fivefold, and total value and total basis are unchanged.
4. D.1,000 shares with a cost basis of $20.00 per share and a total market value of about $20,000The share count must fall to 200. Keeping 1,000 shares at the post-split price quintuples the client wealth, which no split does.

Why: A reverse split reduces the share count and raises the per-share price and per-share cost basis proportionally, leaving both total market value and total cost basis unchanged. One-for-five turns 1,000 shares into 200 shares, raises the market price from $4.00 to $20.00 and raises the cost basis from $4.00 to $20.00 per share. Total value stays at $4,000 and total basis stays at $4,000, so no gain or loss is recognized.

After a 2-for-1 stock split, a shareholder has:

1. A.Half the sharesLosing shares is the reverse split outcome. A 2-for-1 runs the other way, exchanging each existing share for two.
2. B.Twice the total valueThis carries the doubled share count over to value while ignoring what happens to price. The per-share price is cut in half at the same moment, so the holding is worth what it was worth before; a split creates no wealth.
3. C.A taxable gainNothing was sold and nothing of value was received, so there is no realization event. The original cost is simply spread across the larger number of shares, lowering basis per share while total basis stays put.
4. D.Twice the shares at half the price, same total valueCorrect - splits do not change total value.

Why: A 2-for-1 split doubles shares and halves the price per share; total value is unchanged.