Original Cost and Adjusted Book Cost

In response to one of our more frequently asked questions, we thought it would be helpful to clarify the difference between original cost and adjusted book cost.
 

Original Cost and Adjusted Book Cost

A simple explanation to understand the difference between original cost and adjusted book cost of an investor’s holding in an investment fund.

Assume an investor buys $100,000 worth of a $10.00 investment fund to purchase 10,000 units. The investor’s cost is obviously $100,000.

Next, assume the fund declares a 50¢ dividend per unit. Consequently, the investor receives $5,000 in dividends (10,000 units @ 50¢ = $5,000). If the investor decides to take $5,000 in dividends as a cash disbursement, the investor’s cost base remains at $100,000 as does his adjusted book cost.

However, if the investor decides to reinvest the $5,000 at say $10.00 (assuming an unchanged price for simplicity) this results in an additional 500 units. The investor now holds a total of 10,500 units at $10.00 for a value of $105,000.

Unfortunately, this is where some investors become confused:

  • The investor’s original cash cost remains at $100,000
  • However, the new adjusted book cost of the investor who reinvested the dividend becomes $105,000.

This difference will lead some investors to confuse how much capital they originally invested. The fact is that the original cash cost remains at $100,000. On the other hand, the adjusted book cost for those who reinvested the $5,000 dividend to purchase more units results in an “adjusted book cost” of $105,000.

In summary, this explanation should clarify the difference between an investor’s original cash outlay and the adjusted book cost that appears on one’s quarterly ABC Funds’ account statements.

If there are any further questions or comments on this topic, please feel free to contact me at imichael@abcfunds.com.

Sincerely,

Irwin A. Michael Signature

Irwin A. Michael, President
I.A. Michael Investment Counsel Ltd.

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