Sweetwater Corporation Declared a Stock Distribution to All Common Stock

question 47

Essay

Sweetwater Corporation declared a stock distribution to all common stock shareholders of record on December 31, 20X3. Shareholders will receive one share of Sweetwater common stock for each five shares of common stock they already own. Pierre Dorgan owns 500 shares of Sweetwater common stock, with a tax basis of $150 per share. The fair market value of the Sweetwater common stock was $90 per share on December 31. What is Pierre's income tax basis per share in his new and existing common stock in Sweetwater, assuming the distribution is nontaxable?

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Definitions:

Coupon Rate

The annual interest rate paid by a bond's issuer to its holders, expressed as a percentage of the bond's face value.

Tax Shield

A reduction in taxable income for individuals or corporations achieved through claiming allowable deductions such as mortgage interest, medical expenses, amortization, and depreciation.

Debt-Equity

A financial figure indicating the comparative use of shareholders' equity and debt in asset finance.

All Equity

Pertains to the total shareholder equity in a company, encompassing all issued equity capital, including common and preferred shares, retained earnings, and additional paid-in capital.