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 consumers 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 shares were trading for $75.14.
Answer the following questions about the impact of the stock split on his holdings and taxes. Nathan is in the 28% federal income tax bracket.
a. How many shares of General Mills will Nathan own after the stock 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 holdings before and after the split, given that the price of General Mills stock immediately after the split was $37.50. What do you find?
d. Does Nathan experience a gain or loss on the stock as a result of the 4-for-1 split?
e. What is Nathan's tax liability from the event?