El Toro Corporation Declared a Common Stock Dividend to All

question 25

Multiple Choice

El Toro Corporation declared a common stock dividend to all shareholders of record on June 30,20X3.Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own.Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share.The fair market value of the El Toro stock was $100 per share on June 30,20X3.What are the tax consequences of the stock dividend to Raoul?

• A) $0 dividend income and a tax basis in the new stock of $100 per share.
• B) $0 dividend income and a tax basis in the new stock of $60 per share.
• C) $0 dividend income and a tax basis in the new stock of $40 per share.
• D) $15,000 dividend and a tax basis in the new stock of $100 per share.

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Definitions:

Average Accounting Rate of Return

A financial ratio indicating the average annual profit earned through an investment, compared to the initial investment cost.

Crossover Rate

The discount rate at which two investment projects have the same Net Present Value (NPV), often used in capital budgeting.

Projects

Specific tasks or initiatives undertaken to achieve a particular goal, often requiring a significant amount of planning and work.

IRR Cross-Over Rate

The rate at which two projects have the same net present value (NPV) when considering their internal rate of return (IRR), used to choose between competing projects.