Evaluate Corporate Actions - Securities Industry Essentials SIE

1. What is the key effect of a stock dividend on an investor's total cost basis?

   Total cost basis is unchanged. Stock dividends distribute additional shares without cash outflow, maintaining the overall investment value reflected in the total basis.

2. Calculate new basis per share after a $1$-for-$5$ reverse split if old basis was $10$ per share.

   $50$ per share. The basis increases fivefold as it concentrates into one-fifth the shares post $1$-for-$5$ reverse split.

3. What is the key price effect when a stock begins trading ex-rights?

   Price typically drops by the value of the rights. On the ex-rights date, the stock price adjusts downward to exclude the value of the detachable subscription rights.

4. State the basis allocation formula using FMV: parent FMV $P$ and spin-off FMV $S$.

   Parent basis $=B\times\frac{P}{P+S}$; Spin basis $=B\times\frac{S}{P+S}$. The formula apportions total basis $B$ based on the FMV ratio of parent $P$ to total $P+S$, ensuring proportional allocation.

5. Identify the typical price effect of a reverse stock split on the split effective date.

   Price adjusts upward proportionally. Reverse splits decrease outstanding shares, concentrating value into fewer shares and proportionally increasing the price per share.

6. What is the standard method to allocate basis between parent and spun-off shares?

   Allocate by relative fair market values at distribution. Basis allocation uses relative FMVs to proportionally distribute the original cost between parent and spun-off shares at distribution.

7. What is the key effect of a reverse stock split on cost basis per share?

   Cost basis per share increases proportionally. Reverse splits consolidate shares, concentrating the total basis into fewer units and thus raising the basis per remaining share.

8. State the new shares formula after a forward split of $a$-for-$b$ on $N$ shares.

   New shares $= N\times\frac{a}{b}$. An $a$-for-$b$ forward split multiplies original shares by $\frac{a}{b}$ to reflect the increased number of shares issued.

9. What is the key effect of a forward stock split on total cost basis?

   Total cost basis is unchanged. Forward splits increase share count without altering the total investment value, keeping the aggregate basis the same.

10. What is the key effect of a cash dividend on an investor's cost basis in the shares?

    Cost basis is unchanged. Cash dividends represent income rather than a return of capital, thus preserving the original investment cost in the shares.

11. What is the key impact of a rights offering on an investor who sells the rights?

    Sale proceeds create a gain or loss versus rights basis. Selling rights results in capital gain or loss calculated against the basis allocated to the rights from the original stock.

12. What is the key effect of a cash dividend on a stock's price on the ex-dividend date?

    Price typically drops by the dividend amount. On the ex-dividend date, the stock price adjusts downward as it no longer includes the right to receive the upcoming cash dividend.

13. What is the key impact of a spin-off on the shareholder's original cost basis?

    Original basis is allocated between parent and spin-off. In a spin-off, the original basis must be divided to reflect the separation of assets into parent and new entity shares.

14. Calculate new shares after a $1$-for-$5$ reverse split for an investor with $500$ shares.

    $100$ shares. A $1$-for-$5$ reverse split consolidates shares by multiplying by $\frac{1}{5}$ to reduce outstanding shares.

15. Calculate new shares after a $2$-for-$1$ split for an investor with $150$ shares.

    $300$ shares. A $2$-for-$1$ split doubles the shares by multiplying original count by $\frac{2}{1}$ to increase liquidity.

16. State the new per-share basis formula after a forward split of $a$-for-$b$.

    New basis/share $= \text{old basis/share}\times\frac{b}{a}$. The basis per share scales by $\frac{b}{a}$ to maintain total basis amid the proportional increase in share count from the split.

17. What is the key effect of a forward stock split on cost basis per share?

    Cost basis per share decreases proportionally. Forward splits dilute the basis across more shares, reducing the cost attributed to each share in proportion to the split ratio.

18. Identify the typical price effect of a forward stock split on the split effective date.

    Price adjusts downward proportionally. Forward splits increase outstanding shares, diluting the price per share in proportion to the split ratio to maintain market cap.

19. What is the key effect of a reverse stock split on total cost basis?

    Total cost basis is unchanged. Reverse splits reduce share count without changing the investment's overall value, preserving the total cost basis.

20. Calculate new shares after a $10\%$ stock dividend if an investor owns $200$ shares.

    $220$ shares. A $10\%$ stock dividend adds $10\%$ more shares, increasing total by a 1.1 multiplier to distribute earnings as stock.

21. Calculate new basis per share after a $2$-for-$1$ split if old basis was $40$ per share.

    $20$ per share. The basis halves as it spreads over twice as many shares post $2$-for-$1$ split, maintaining total investment value.

22. What is the key effect of a stock dividend on cost basis per share?

    Cost basis per share decreases. Additional shares from the dividend spread the total basis over more units, reducing the basis allocated to each individual share.

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