Question

Worst Buy Company has had a lot of complaints from customers of late, and its stock price is now only $3 per share. It is going to employ a one-for-six reverse stock split to increase the stock value. Assume Dean Smith owns 120 shares.

a. How many shares will he own after the reverse stock split? (Do not round intermediate calculations and round your answer to the nearest whole number.)

b. What is the anticipated price of the stock after the reverse stock split? (Do not round intermediate calculations and round your answer to 2 decimal places.)

c. Because investors often have a negative reaction to a reverse stock split, assume the stock only goes up to 80 percent of the value computed in part b. What will the stock’s price be? (Do not round intermediate calculations and round your answer to 2 decimal places.)

d. How has the total value of Dean Smith’s holdings changed from before the reverse stock split to after the reverse stock split (based on the stock value computed in part c)? To get the total value before and after the split, multiply the shares held times the stock price. (Input the amount as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

No of Shares held after the reverse stock split = No of shares held * Split ratio

No of Shares held after the reverse stock split = 120 * (1 / 6)

No of Shares held after the reverse stock split = 20 shares

Share price after reverse stock split = Share price * (1 / Split ratio)

Share price after reverse stock split = $3 * (1 / 1 / 6)

Share price after reverse stock split = $18

Share price due to negative reaction = Share price after reverse stock split * 80%

Share price due to negative reaction = $18 * 80%

Share price due to negative reaction = $14.4

Total share holding before the reverse stock split = No of Shares * Share price

Total share holding before the reverse stock split = 120 * $3

Total share holding before the reverse stock split = $360

Total share holding after the reverse stock split = No of Shares held after the reverse stock split * Share price due to negative reaction

Total share holding after the reverse stock split = 20 * $14.4

Total share holding after the reverse stock split = $288

Change in holdings = Total share holding after the reverse stock split - Total share holding before the reverse stock split

Change in holdings = $360 - $288

Change in holdings = $72