Question

Sandra recently purchased 145 shares of a company for $10150 ($70 per share). The company has been doing well. Given the success of the company, her shares are now worth $200 each. This year, she received a dividend of $1015, which she reinvested to purchase 5 shares of stock in the company. How does Sandra’s decision to reinvest her dividend (buy more stock) affect her total basis in the investment?

a) Sandra’s total basis invested increased from $10150 to $11165.

b) Sandra’s total basis increased from 145 shares to 150 shares.

c) Sandra’s total basis decreased to $9135 and then increased back to $10150.

d) Sandra’s total basis is not affected by reinvesting her dividends.

Answer 1

The answer is :a) Sandra’s total basis invested increased from $10150 to $11165.

Reason: A stock's cost basis is its purchase price and all reinvested dividends and commissions.

i.e Investment basis = Purchase price + Reinvested Dividends + Commissions (if any)
= $10,150 + $1,015
= $11,165

Therefore, $11,165 is her total basis in the investment after reinvesting the dividends.

Reasons other options are invalid:

b) Question is asking about the basis in the investment so increase in number of shares is not a valid answer.
c) Receiving dividends will not decrease the cost basis of a stock. So option "c" is invalid.
d) Reinvesting of dividend will affect the or increase the cost basis, so option "d" is also invalid.