Edie's Health and Beauty Supply has 125,000 shares of stock outstanding with a book value of $1.75 per share and a market value of $5 per share. The company has retained earnings of
$76,500. The company just announced a 1-for-5 reverse stock split. How many shares of stock will
Be outstanding after the split?

Question

Quizplus · Accepted Answer

A reverse stock split consolidates multiple shares into one share, so the total number of outstanding shares will decrease. In this case, a 1-for-5 reverse stock split means that for every 5 shares that an investor owns, they will receive 1 share.

Since Edie's has 125,000 shares outstanding, we can determine that there are 25,000 groups of 5 shares. So after the reverse stock split, there will be 25,000 shares outstanding (5 groups of 5 shares consolidated into 1 share).

Edie's Health and Beauty Supply Has 125,000 Shares of Stock