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Question

Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

An investor holds 600600 shares of Zenith Logistics common stock, currently trading at a market price of $2.50\$2.50 per share. The company executes a 11-for-55 reverse stock split. Immediately following the effective date of the split, what is the investor's new share quantity and adjusted market price per share?

  1. 120120 shares at $12.50\$12.50 per shareAnswer
  2. B
    3,0003,000 shares at $0.50\$0.50 per share
  3. C
    120120 shares at $0.50\$0.50 per share
  4. D
    600600 shares at $12.50\$12.50 per share

Answer

120 shares at $12.50 per share
The correct answer demonstrates that a 1-for-5 reverse stock split reduces the share quantity to one-fifth of the original count (600×15=120600 \times \frac{1}{5} = 120 shares) while increasing the price per share by a factor of five ($2.50×5=$12.50\$2.50 \times 5 = \$12.50). Total position value remains constant at $1,500\$1,500.

Step-by-Step Solution

1
Calculate the pre-split total position value
Position Value = 600×$2.50=$1,500600 \times \$2.50 = \$1,500
Corporate actions such as stock splits change position structure but do not alter total economic value.
2
Calculate the post-split share quantity
New Shares = 600×15=120600 \times \frac{1}{5} = 120 shares
A 1-for-5 reverse split consolidates every 5 existing shares into 1 new share.
3
Calculate the post-split adjusted price per share
New Price = $1,500120=$12.50\frac{\$1,500}{120} = \$12.50 per share
The share price must increase proportionally so that the overall position value remains $1,500.

Key Concept

Reverse Stock Split Position Adjustment
Estimated Time:1m 0s
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions