Tara Owns Common Stock in Taupe, Inc

question 224

Essay

Tara owns common stock in Taupe, Inc., with an adjusted basis of $250,000. She receives a preferred stock dividend which is nontaxable.
a. What effect does the preferred stock dividend have on Tara's adjusted basis of the common stock?
b. How is the basis of the preferred stock calculated?
c. What effect does the preferred stock dividend have on Tara's gross income?

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Definitions:

Conversion Premium

The additional amount over the current value that an investor pays to convert a convertible security into a specified number of shares of common stock.

Conversion Ratio

The specific quantity of common shares an investor can receive for converting each unit of a convertible security, such as a convertible bond or preferred stock.

Par Value

The face value of a bond or stock, typically the amount that is paid back at maturity for bonds or a nominal dollar value assigned to shares of stock.

Coupon Bond

A type of bond that offers interest payments to the holder at specified intervals until the bond's maturity.