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When a company takes part of its business and spins it off into a separate company with separate finances and stocks, the company typically will indicate the spinoff cost basis. If not, then you can use a formula to determine the cost basis. This primarily involves multiplying, adding and dividing several integers, including the spinoff and main company’s current stock figures, their market price and the spinoff’s distribution ratio. Most of the factors can be found without the main company’s help, though you may need to contact the main company for the spinoff distribution rate. While you will get an equivalent value of spinoff stocks as compared to the main company's stocks, knowing the spinoff cost basis is essential to continuing your investment, especially if you decide to sell the spinoff shares.
The first part of the formula requires the spinoff’s current share price and the distribution ratio, or the ratio of shares you received against the main company’s shares. If you do not know the distribution ratio, then you should contact the main company or consult its website for this figure; the current share price can be found by looking at the stock market. You then multiply the two to get the spinoff’s market price.
It also is possible to find the main company’s current share price by checking the stock market. The spinoff and main company share prices must be figured out on the same day or the figure will not be correct. After figuring this out, adding it to the spinoff’s market price will give you the total market price.
Taking the spinoff market price and dividing it by the total market price will provide the spinoff percentage. This next part is not necessary but, if you want to ensure your answer is correct, you can divide the main company share price by the total market price. If the numbers are correct, both the spinoff and main company percentages will add up to 100. The main number you need from this part is the spinoff percentage.
The next step is to multiply the spinoff percentage by your total investment in the main company. For example, if the spinoff percentage is 25 percent and the total investment is $10,000 US Dollars (USD), then the spinoff cost basis is $2,500 USD. Dividing this number by the number of spinoff shares you have will give you the spinoff cost basis for each share. This number can be used to figure out how many shares you own of the main company by subtracting the spinoff cost basis and the total investment; in this example, you would still own $7,500 USD worth of shares from the main company.
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