Kevin Purchased 5,000 Shares of Purple Corporation Stock at $10

question 7

Multiple Choice

Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend?

• A) $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.
• B) $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.
• C) $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.
• D) $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.
• E) None of the above.

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Definitions:

Statement Of Cash Flows

A financial statement that provides aggregate data regarding all cash inflows and outflows a company receives from its ongoing operations, investment activities, and financing activities.

Financial Statements

Documents that provide an overview of the financial condition of a company, including the balance sheet, income statement, and cash flow statement.

Return On Equity

A financial ratio that measures a company's profitability by revealing how much profit it generates with the money shareholders have invested.

Cash Flow

The complete sum of funds moving in and out of a corporation, impacting its ability to meet short-term obligations.