Examkin

Question

Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

An investor holds 1,2001,200 shares of common stock currently trading at a market price of $15.00\$15.00 per share. The board of directors announces a 11-for-55 reverse stock split. What is the new adjusted market price per share, in dollars, immediately following the reverse stock split?

Answer: 75 USD

Answer

The new adjusted market price per share following the reverse stock split is $75.00.
Following a 1-for-5 reverse stock split, the investor receives 1 new share for every 5 shares previously held. The number of shares decreases from 1,200 to 240 (1,200÷5=2401,200 \div 5 = 240), while the price per share increases proportionally by a factor of 5 ($15.00×5=$75.00\$15.00 \times 5 = \$75.00). Total position value remains constant at $18,000\$18,000.

Step-by-Step Solution

1
Determine the stock split factor
In a 1-for-5 reverse stock split, the split factor is 15=0.20\frac{1}{5} = 0.20.
A reverse stock split reduces the overall number of outstanding shares while proportionally increasing the share price.
2
Calculate the post-split price per share
Divide the pre-split market price by the split factor: $15.000.20=$15.00×5=$75.00\frac{\$15.00}{0.20} = \$15.00 \times 5 = \$75.00.
The total market value of the investor's position remains unchanged before and after the corporate action (1,200 shares×$15.00=$18,0001,200 \text{ shares} \times \$15.00 = \$18,000, and 240 shares×$75.00=$18,000240 \text{ shares} \times \$75.00 = \$18,000).

Key Concept

Calculating position adjustments and share price changes following a reverse stock split
Estimated Time:1m 0s
Rate this question

Topics

Settlement Dates, Trade Confirmations, and Corporate Actions