stock spinoffs

RonDavis

What is the best way to handle company spinoffs? $EXC spinoff new company $CEG giving 1 share of $CEG for each 3 shares of $EXC held. You still have the initial shares of $EXC and now shares of $CEG. Whats the best way to maintain cost basis? Thanks for the help.

VidasMatelis

Lets say you had 30shares of $EXC that you paid 50$ for each share and now price is 75$
You decided that original $EXC will have 70% of capital cost and new shares will have 30%.
Original capital cost: 30x50=1500$
After spinoff capital cost:
$EXC: 1500$x70%=1050$, still 30 shares, new capital cost: 1050/30=35$ per share
$CEG: 1500$x30%=450$, new 10 shares, new capital cost: 450/10=45$ per share
At the time of the transaction price per share was 75$, so total value 75$x30=2250$.
We split 2250$ using 70%/30% : 1575$/675$ and price per share is:
$EXC: 1575$/30=52.5$ per share
$CEG: 675$/10=67.5$ per share

Transactions would be (same day):
$EXC SymbolTransferOut 30shares, 75$ price per share
$EXC SymbolTransferIn 30shares, 52.5$ price per share, CostBasisOverride: 1050$.
$CEG SymbolTransferIn 10shares, 67.5$ price per share, CostBasisOverride: 450$.

When you will put in your actual number, they will make more sense. With these transactions we introduced new symbol $CEG and transfered part of Capital Cost that that symbol and also at the time of the transaction we kept total value of $EXC before split and total value of $EXC+$CEG after split on the day of the split the same.

RonDavis

Vidas, thank you for the explanation, and using actual numbers did help.

dinotuf

Hi Vidas,
I have couple of questions about the spin off example and the solution you propose for PS.
First, you transfer shares out and in on current share price with costbasis override. Would it also work if one would do this on price reflecting the capital cost directly in the price without costbasis override? If not, why? What is the difference? To clarify:
Transactions would be:
$EXC SymbolTransferOut 30shares, 50$ price per share
$EXC SymbolTransferIn 30shares, 35$ price per share
$CEG SymbolTransferIn 10shares, 45$ price per share

My second question is if this is necessary to be done on the same transaction day? I feel that it is easier to follow/understand calculation of CBI in the PS file if the transfer-out comes one day before transfer-in.

Much appreciated that you take your time and answer.

VidasMatelis

dinotuf,

When doing spin off transactions, you have to:
1. First make sure that the number of shares for all symbols after the spinoff is correct (including the shares that were for example replaced).
2. Second make sure that the cost basis is calculated OK for shares that are transferred out and for shares that are transferred in. But sometimes "Sell" or "transfer out" calculations can be complicated and might have errors - this is especially true if you have multiple buy transactions. So it is safer to provide cost basis override if you calculated that yourself. For symboltransferIn transaction cost basis would be price x share, and if that is correct, then you do not have to specify costBasisOverride.
3. Thrid you have to make sure that the sum of transactions has little impact on your total value change for that day in the impacted account(s). If your case 30*50=30*35+10*45, that is 1500=1500 - so before SymbolTransferOut value of $EXC is 1500$ and after the split total value of both symbols is 1500$ - so this looks good.

It is better to enter these types of multiple transactions on the same day. Some calculations like "Value Change %" calculate changes on a "per day basis" so if there is large drop one day and then large growth next day, then "value change %" calculation might not be correct.

dinotuf

Thank you Vidas for the clarification. I understand it much better now.