Michael's Boating Supplies has 150,000 shares of stock outstanding with a par value of $1 per share and a market value of $10 a share. The company has retained earnings of $76,500 and capital in excess of par of $340,000. 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 reduces the number of outstanding shares and increases the price per share. In this case, the company is doing a 1-for-5 reverse stock split, which means that for every 5 shares of stock outstanding, shareholders will receive 1 new share.

Before the reverse stock split, there were 150,000 shares outstanding. After the reverse stock split, there will be 150,000/5 = 30,000 shares outstanding. The par value and capital in excess of par do not change with the split. The market value of the stock will adjust accordingly, but the total value of the company (number of shares x price per share) will remain the same.

Michael's Boating Supplies Has 150,000 Shares of Stock Outstanding with a Par