Question

In recent years Constable Inc. has suffered losses, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $11 per share. How many of the old shares must be given up for one new share to achieve the $11 price, assuming this transaction has no effect on total market value?

a. 20.00

b. 16.00

c. 22.00

d. 18.00

e. 14.00

SHOW WORK / CALCULATIONS PLEASE

Answer 1

Solution) Total Market Value = Number of shares outstanding*Price

Before the reverse stock split:

Total Market Value = N*0.5

where N = Number of shares outstanding

After the reverse stock split:

Price = $11

Total Market Value = N'*11

where N' is the new number of shares outstanding

Since market value is the same before and after the reverse stock split.

N*0.5 = N'*11

N = N'*11/0.5

N = N'*22

N' = N/22

Thus, after the reverse stock split, the number of shares will reduce by 22 times

Hence, 1 new share = 22 old shares

The correct option is C.

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