A firm has 2 million shares outstanding, selling for $3 a share. If the firm does a 1-for-4 reverse split, how many shares will be outstanding and what will the market price per share
Be?

Question

Quizplus · Accepted Answer

A 1-for-4 reverse split means that for every 4 shares a shareholder owns, they will now own 1 share. Therefore, if the firm starts with 2 million shares, after the reverse split, there will be 0.5 million shares outstanding (2 million divided by 4).

However, since the total value of the company has not changed, the market price per share must adjust accordingly. The $3 price per share will be multiplied by 4 (the reverse split ratio) giving a new market price of $12 per share.

Therefore, the correct answer is C. After a 1-for-4 reverse split, the number of outstanding shares will be reduced by a factor of 4. Therefore, the new number of shares will be 2,000,000/4 = 500,000 shares. However, the market price per share will increase by a factor of 4 to compensate for the reduced number of shares. Therefore, the new market price per share will be $3 x 4 = $12. Therefore, the correct choice is C - 0.5 million shares at $12 a share.

A Firm Has 2 Million Shares Outstanding, Selling for $3