Suppose that I paid $2,000 for 100 shares of Enlighten Software Solutions on April 4, 1999....

Suppose that I paid $2,000 for 100 shares of Enlighten Software Solutions on April 4, 1999. Today, the company is worth only 15 cents per share. Suppose that in order to be listed on a particular exchange, it must be priced at $1.50 (or above).

a. What sort of corporate reorganization can the firm conduct to achieve the minimum listing price, holding all else constant?

b. If the firm takes your advice in part (a), how many shares would I own?

Expert Solution

a. Current value per share = 15 cents = $0.15

Minimum value per share needed for listing = Desired price = $1.50

Consolidation or merging of shares by the help of reverse stock split can increase the value per share. Reverse stock split results in decrease in number of shares because shares are combined according to a fixed ratio or fixed number of shares are combined to form a single share of the company. As the number of shares decreases, price of stock also increases

No of shares that need to be combined to form one share = Desired price / Current price

= Minimum value per share needed for listing / Current Price = 1.50 / 0.15 = 10

Thus we need to combine 10 shares of the company to form a single share of the company. After reverse stock split for every old 10 shares investor will get 1 new share

Hence A reverse stock split of 1 for 10 is needed to achieve minimum listing pricing.

b. Current Number of shares owned = 100

No of shares owned after reveres split = Current No of shares owned / No of shares that need to be combined to form one share = 100 / 10 = 10 shares

After taking the advice, number of shares owned = 10

jeff jeffy answered 8 months ago

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Suppose that I paid $2,000 for 100 shares of Enlighten Software Solutions on April 4, 1999....

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