In: Finance
A reverse split is one in which the company reduces its number
of shares outstanding to boost its stock price .
a) For a reverse stock split of two for seven, the company will
take away seven stocks and give back two stocks.
Therefore, if John has 420,000 shares then after stock split he
will own
= 420000 / (7/2)
= 120,000
He will own 120,000 shares after stock split.
b) Market cap of the stock would remain the same even after
reverse stock split.
Before reverse stock split ,
Market cap = 420000 * 13
After reverse stock split
Market cap = 120000 * X
where X is the new anticipated price of the stock
420000 * 13 = 120000 * X
X = 13 * 420000 / 120000
= $45.5
Anticipated price would be $45.5
c) 85% *45.5
= $38.675
d) Before reverse stock split the total value was = 420000 * 13 =
$5460000
after reverse stock split the total value = 120000 * 38.675 = $4641000
Therefore, the total value has declined by ( $5460000 -
$4641000 )= $819000
% decline = 819000 / 5460000
= 15%