Question

Please answer all parts. A,B, C, D, E. Thank you!

Stock splits Personal Finance Problem Nathan Detroit owns 400 shares of the drink company Monster Beverage Corp., which he purchased for $115 per share. Nathan read in the Wall Street Journal that the company's board of directors had voted to split the stock 5-for-1. Just before the stock scat, Monster Beverage shares were trading for $128.92. Answer the following questions about the impact of the stock split on his holdings and taxes. Nathan is in the 22% federal income tax bracket. a. How many shares of Monster Beverage will Nathan own after the stock split? b. Immediately after the split, what do you expect the value of Monster Beverage to be? C. Compare the total value of Nathan's stock holdings before and after the split. What do you find? d. Does Nathan experience again or loss on the stock as a result of the 5-for-1 split? e. What is Nathan's tax liability from the event? a. The number of shares of Monster Beverage Nathan will own after the 5-for-1 split is shares (Round to the nearest whole number) Enter your answer in the answer box and then click Check Answer. LCD 1*720*2011. EQN

Answer 1

In a stock split the no of shares in the hands of shareholders increases by reducing the face value without changing the value of its original holding with status quo on market price just before stock split. Keeping all other things constant, the market price of stock will change in proportion to stock split.

a.

5-for-1 stock split means for every 1 share, the shareholder will get 5 shares of Monster Beverage Corp. Hence, Nathan will own 400*5 = 2000 shares after the stock split.

b.

Just before stock split, General Mills share were trading for $128.92. Post stock split, the value of shares will reduce by 1/5

that is 128.92/5 = $25.784

c.

Total value of Nathan’s tock holding before split was $128.92* 400 = $51,568

Total value of Nathan’s stock holding after split will be $25.784* 2000 = $51,568

From the above calculations, we see that total value of Nathan’s stock holding does not change.

This shows that a stock split will not change the total value of Nathan's stock holdings.

d.

There is no gain no loss from the stock split.

e.

As there is no change in the stock holdings there is no tax liability as a result of stock split (event)

Therefore tax liability is $0