Liquid Farms is considering a 1-for-2 reverse stock split. Its stock is currently selling for $10 per share. Liquid plans to pay a dividend equal to $0.40 per share after the split. But, it would like to pay an equivalent dividend per share even if the split does not take place. What should the per share dividend be if Liquid doesn't split the stock?

Question

Quizplus · Accepted Answer

After the 1-for-2 reverse stock split, the number of outstanding shares will be halved while the price per share doubles. Therefore, the stock price will be $20 per share after the split. If Liquid Farms pays a dividend of $0.40 per share after the split, this is equivalent to a dividend of $0.20 per pre-split share. If the split does not take place and Liquid wants to pay an equivalent dividend per share, the dividend should be $0.20 per share. Therefore, the answer is (B).

Liquid Farms Is Considering a 1-For-2 Reverse Stock Split