Acme Corporation Acquires Fisher Corporation's Assets in a Type a Reorganization

question 3

Multiple Choice

Acme Corporation acquires Fisher Corporation's assets in a Type A reorganization for $800,000 of Acme's nonvoting preferred stock and $200,000 (face amount and FMV) of securities. The assets have an adjusted basis of $600,000 and an FMV of $1,500,000. In addition, Acme Corporation assumes $500,000 of Fisher's liabilities. At the time of the transfer, Acme's E&P is $400,000. Fisher distributes the stock and securities to its sole shareholder Barbara for all of her Fisher stock. After the reorganization, Barbara owns 25% of Acme's stock. Barbara has an adjusted basis of $400,000 in her Fisher stock. Barbara must recognize a gain of

• A)$0.
• B)$200,000 dividend income.
• C)$200,000 capital gain.
• D)$650,000 capital gain.

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Definitions:

Source of Funds

Refers to the origins of the capital or money a company uses for its operations or investments.

Cost of Capital

A metric used to determine the minimum expected return needed on an investment in order to be deemed a worthwhile expenditure, reflecting the investor's required return.

Systematic Risk

The inherent risk associated with the entire market or market segment, which cannot be eliminated by diversification.

SML Approach

The SML (Security Market Line) Approach is a relationship depicted in a graph that shows the expected return of a security against its risk, represented by beta.