Question

Worst Buy Company has had a lot of complaints from customers of late, and its stock price is now only $4 per share. It is going to employ a one-for-six reverse stock split to increase the stock value. Assume Dean Smith owns 144 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 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

Post-split shares = Pre-split shares * Split ratio

Post-split shares = 144 * 1/6

Post-split shares = 24 shares

Part B

Post-split stock price = Pre-split price * (1 / Split ratio)

Post-split stock price = 4 * (6/1)

Post-split stock price = 24

Part C

Adjusted stock price = Adjustment ratio * Post-split price

Adjusted stock price = 0.8 * 24

Adjusted stock price = 19.2

Part D

Pre-split value = Pre-split shares * Pre-split price

Pre-split value = 144 * 4 = 576.00

Post-split value = Post-split shares * Post-split price

Post-split value = 24 * 19.2

Post-split value = 460.80

Change in value = Post-Split value - Pre-Split value

Change in value = 460.80 - 576

Change in value = -115.2

The value of Dean Smith's holdings decreased by $115.20