Mike owns 10,000 shares of the common stock of Aero, Inc., with a


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Mike owns 10,000 shares of the common stock of Aero, Inc., with a stock basis $60,000 (i.e., $6 per share) and a market value of $20 per share. Mike also owns 1,000 shares of Aero preferred stock with a basis of $100 per share (value of the preferred is $200 per share). Aero has a very large balance in its E&P account. For each of the following independent situations, select the best answer. – A. B. C. D. E. F. G. H. I. J. Aero board of directors authorized a stock split in which each share of common stock was retired and the shareholder received two shares of the same class of common stock, the par value of which was cut in half. The value of each share of common stock was $10 immediately after the stock split. Mike received 20,000 new common shares worth $200,000 in replacement of his 10,000 old common shares (also worth $200,000). – A. B. C. D. E. F. G. H. I. J. Aero board of directors authorized the distribution to its common shareholders a 20% stock dividend–i.e., for each 5 shares owned, one new share will be distributed. The value of each share of common stock was $16.67 immediately after the stock dividend. Mike received 2,000 new common shares worth $33,340. – A. B. C. D. E. F. G. H. I. J. Aero board of directors authorized the distribution to its common shareholders a 20% stock dividend–i.e., for each 5 shares owned, one new share will be distributed. The value of each share of common stock was $16.67 immediately after the stock dividend. Each shareholder was given a 2-week window during which time he/she/it could elect to receive a cash distribution of $3.33 per common share owned. Mike did not elect to receive the cash distribution, so he received 2,000 new common shares worth $33,340. – A. B. C. D. E. F. G. H. I. J. Aero board of directors authorized the distribution to its common shareholders one share of preferred stock (market value $200 per share) for every 50 common shares owned. Mike received 200 shares of newly distributed preferred stock worth $40,000. The market value of each common share remained unchanged at $20 per share. – A. B. C. D. E. F. G. H. I. J. Aero board of directors authorized the distribution to its preferred shareholders two shares of common stock (market value $20 per share) for every preferred share owned. Mike received 2,000 shares of newly distributed common stock worth $40,000. The market value of each common share remained unchanged at $20 per share, and the value of each preferred share was $200. A. The stock split will be a taxable transaction, resulting in dividend income equal to the value of the newly issued common shares. The basis of each old share of common stock owned after the stock split will be $5 (compared to $6/share before the stock split). The basis of the new common shares is $20. B. This would be a taxable stock distribution, resulting in $40,000 dividend income and the basis of the newly distributed preferred shares being $200 per share (i.e., market value of the new shares). C. The stock split will be a non-taxable transaction–no dividend income. The basis of each share of common stock owned after the stock split will be $3.00 (compared to $6/share before the stock split). The value of each share of common stock was $10 immediately after the stock dividend. D. The stock dividend will be a non-taxable transaction–no dividend income. Mike’s stock basis in his “old” shares will be reallocated to include the newly distributed shares. The basis of each share of common stock owned after the stock dividend will be $5.00 (compared to $6/share before the stock dividend). E. This would be a taxable stock distribution, resulting in $33,340 dividend income and the basis of the newly distributed shares being $16.67 per share (i.e., market value of the new shares). F. The stock dividend will be a non-taxable transaction–no dividend income. Some of Mike’s stock basis in his “old” common shares will be allocated to the newly distributed preferred shares. The basis of each sh

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