Wonder Corporation Declared a Common Stock Dividend to All Shareholders

question 80

Multiple Choice

Wonder Corporation declared a common stock dividend to all shareholders of record on September 30,20X3.Shareholders will receive three shares of Wonder stock for each five shares of stock they already own.Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000) .The fair market value of the Wonder stock was $180.00 per share on September 30,20X3.What are the tax consequences of the stock dividend to Diana?

• A) $0 dividend income and a tax basis in the new stock of $180.00 per share.
• B) $0 dividend income and a tax basis in the new stock of $67.50 per share.
• C) $0 dividend income and a tax basis in the new stock of $56.25 per share.
• D) $10,800 dividend and a tax basis in the new stock of $180.00 per share.

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Definitions:

Capital Budgeting

The process of planning significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of a new product.

Internal Rate

Commonly identified as the internal rate of return (IRR), this is the discount rate that sets the net present value (NPV) of all cash flows associated with a specific project to zero.

Discounted Cash Flow

A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for time value of money.

Working Capital

The difference between a company's current assets and current liabilities, indicating the short-term liquidity.