Worst Buy Company has had a lot of complaints from customers of late, and its st
ID: 2806166 • Letter: W
Question
Worst Buy Company has had a lot of complaints from customers of late, and its stock price is now only $2 per share. It is going to employ a one-for-six reverse stock split to increase the stock value. Assume Dean Smith owns 126 shares a. How many shares will he own after the reverse stock split? (Do not round intermediate calculations and round your answer to the nearest whole number.) Number of shares b. What is the anticipated price of the stock after the reverse stock split? (Do not round intermediate calculations and round your answer to 2 decimal places.) Anticipated stock price c. Because investors often have a negative reaction to a revere stock split, assume the stock only goes up to 80 percent of the value computed in part b. What will the stock's price be? (Do not round intermediate calculations and round your answer to 2 decimal places.) Stock price d. How has the total value of Dean Smith's holdings changed from before the reverse stock split to after the reverse stock split (based on the stock value computed in part c)? To get the total value before and after the split, multiply the shares held times the stock price. (Input the amount as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places.) Dean Smith's holdingsExplanation / Answer
Answer a) A reverese stock split will decrease the number of shares owned and the investor will get 1 new share for 6 older shares of the company.
Number of shares after reverese split = 126 / 6 = 21
Answer b) Total value of shares held before reverese split = 126 x 2 = 252
Stock price after reverese split = Total value of equity / Number of new shares after split = 252 / 21 = 12
Answer c) If stock total value if 80% of original value then, total value = 252 x 80% = 201.60
Per share stock price = 201.60/ 21 = 9.60
Answer d) The total value of holding before reverse stock split = 126 x 2 = 252
Total value of holding after reverse stock split= 252x80% = 201.60 (As per c part where reverese stock split is seen as a negative corporate action and holding value decreases due to negative market sentiments)
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