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22 November, 23:13

A customer has purchased 1,000 shares of ABC stock at $44 per share, paying a commission of $1.00 per share for the transaction. ABC stock declares a 20% stock dividend. When the dividend is paid, the tax status of the investment is:A. 1,000 shares held at a cost basis of $44 per share

B. 1,000 shares held at a cost basis of $45 per share

C. 1,200 shares held at a cost basis of $36.66 per share

D. 1,200 shares held at a cost basis of $37.50 per share

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  1. 22 November, 23:17
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    Option D) 1,200 shares held at a cost basis of $37.50 per share

    Explanation:

    Data provided in the question:

    Number of shares of ABC stocks purchased by the customer = 1,000

    Price per share of ABC stock = $44

    Commission paid = $1.00 per share

    Stock dividend declared = 20%

    Now,

    The Payment of a stock dividend will increase the number of shares held by the investor

    also,

    each share is theoretically worth less after the stock dividend is paid.

    Therefore,

    The number of shares customer will have = Shares purchased * (1 + Dividend declared)

    = 1000 * (1 + 0.20)

    = 1200 shares

    Also,

    Cost basis for the share = Selling price + Commission

    = $44 + $1

    = $45

    Thus,

    The adjusted cost basis = $45 : 1.20

    = $37.50 per share

    Hence,

    Option D) 1,200 shares held at a cost basis of $37.50 per share
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