Question

Worst Buy Company has had a lot of complaints from customers of late, and its stock price is now only $2 per share. It is going to employ a one-for-six reverse stock split to increase the stock value. Assume Dean Smith owns 150 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 revere stock split, assume the stock only goes up to 90 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

A reverse stock split decreases the total number of shares and increases the share price

Given Information:

Stock price before reverse stock split: $2

Reverse stock split: one for six, means that 6 stocks become 1.

Number of shares Dean Smith owns: 150

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.)

After the one for six reverse stock split, Dean Smith will own 150/6 = 25 shares

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.)

Stock price before reverse stock split: $2

After the one for six reverse stock split, anticipated price of the share = $2 * 6 = $12

c. Because investors often have a negative reaction to a reverse stock split, assume the stock only goes up to 90 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.)

After reverse stock split, if the stock only goes up to 90 percent of the value computed in part b, the stock price will be = $12 * 0.9 = $10.8

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.

Value of Dean Smith’s holdings before the reverse stock split = Number of shares held before reverse stock split * Stock price before reverse stock split = 150 * 2 = $300

Value of Dean Smith’s holdings after the reverse stock split (based on the stock value computed in part c) = Number of shares held after reverse stock split * Stock price after reverse stock split based on part c = 25 * 10.8 = $270

Value of Dean Smith’s holdings after the reverse stock split has fallen by 10%.