The average volume weighted price used in the exchange ratio calculation was $35.3441. This means that .7073 shares of IP common stock represented the $25 of value agreed upon by Champion and IP when the transaction was negotiated. The 100 shares of Champion stock would therefore convert into 70 shares of IP stock. Fractional shares (the remaining .73 shares) are paid in cash. Therefore, if you held 100 shares of Champion common stock, you would receive 70 shares of IP common stock.
Because the agreed upon cash value of transaction was $50 per common share of Champion stock, cash received would equal $5,000 (100 Champion common shares x $50/share) plus the cash value of any fractional IP shares due. Pursuant to the Merger Agreement, the value of fractional shares is determined by taking the average of the last reported sales price of IP common stock for the 20 trading days ending on June 14, 2000. Therefore, the fair market value of the fractional shares is $35.1969. In this case, because there are .73 fractional shares remaining, the shareholder would receive $25.69 (.73 shares x $35.1969) in cash for these shares. Total cash received for the 100 Champion common shares would therefore equal $5,025.69.
The calculation that follows outlines the shareholder’s basis in the new shares, as well as the applicable tax consequences of this transaction. In this case, the shareholder would recognize a gain on the transaction:
A. Original Cost Basis
100 shares x $20/share = $2000.00
B. Consideration Received in Exchange
1. 70 IP shares x $32.625 (Value on June 16) = $2283.75
2. 100 Champion shares x $50/share = $5000.00
3. Cash for .73 fractional shares (.73 x $35.1969) = $25.69
TOTAL = $7309.44
C. Gain or Loss
Total Consideration $7309.44
Cost Basis ($2000.00)
Gain recognized $5309.44
D. Basis in the New IP Shares $2283.75
Note: This calculation is provided for informational purposes only. Specific questions about your unique situation should be discussed with your tax advisor.