Question

Two years ago, a customer purchased 1,000 shares of ABC stock at $45 per share. The stock has appreciated in value and is currently worth $60,000. The company announces that it is spinning off a subsidiary, DEF, to its shareholders. The value of the new company being spun off equals 5% of the old company. The customer will have:___________

Answer 1

Step-by-step explanation:

Spin off can be defined as the splitting of the shares of an existing company in order to form an independent new entities as part of larger business.

In calculating the spill off value of a business ,the aggregate cost of the business is used and not the aggregate cost.

Workings

Shares stock acquired = 1,000

initial share price = $45

Total share value = 45*1000=45,000

Percentage split off to DEF= 5%

Value split off = 5%*45,000 =2,250

Percentage retained in ABC = 95%*5,000

=42,750