Nathan Detroit owns 400 shares of the food company General Mills Inc., which he purchased during the recession in January 2009 for $35 per share. General Mills is regarded as a relatively safe company because it provides a basic product that consumer need in good and bad economic times. Nathan read in the Wall Street Journal that the company’s board of directors had voted to split the stock 2-for-1. In June 2010, just before the stock split, General Mills was trading for $75.00. Answer the following questions about the impact of the stock split on his holding and taxes. Nathan is in the 28% income bracket.
a. How many shares of General Mills will Nathan own after the split?
b. Immediately after the split, what do you expect the value of General Mills to be?
c. Compare the total value of Nathan’s stock holding before and after the split. What do you find?
d. Does Nathan experience a gain or loss on the stock as a result of the 2-for-1 split?
e. What is Nathan’s tax liability from the event?