Question

"Many years ago, a customer bought 1,000 shares of XYZ stock at $40 per share. The company spins off a subsidiary to its shareholders, and the customer gets 100 shares of PDQ stock as a result. On the first day of trading after the spin off, PDQ closes at $20, while XYZ closes at $50. The customer will have a:"_________

Answer 1

Answer:

b. $38,000 cost basis in XYZ and a $2000 cost basis in PDQ

Explanation:

The aggregate cost basis does not change in a spin-off. The original cost basis in XYZ stock is $40,000. After the spin off, the customer gets 100 shares of PDQ, with a $20 per share value = $2,000. This is the PDQ cost basis, and it comes out of the XYZ cost basis.

$40,000 XYZ cost basis - $2,000 PDQ cost basis = $38,000 adjusted XYZ cost basis.

Answer 2

Answer:

B. $38,000 cost basis in XYZ and a $2,000 cost basis in PDQ

Explanation:

Given that

XYZ shares bought = 1000

Price per share = 40

Therefore,

Original cost basis = 40 × 1000

= 40 000

When company spins off a subsidiary,

Customer now have

PDQ shares owned = 100

Price per share = 20

Thus, PDQ cost basis = 20 × 100

= 2000

Since the PDQ is from initial XYZ

Thus

Current XYZ stock = 40,000 - 2,000

= 38,000.

Therefore, we have $38000 cost basis in XYZ, and $2000 cost basis in PDQ