Worst Buy Company has had a lot of complaints from customers of late, and its st

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-five reverse stock split to increase the stock value. Assume Dean Smith owns 140 shares.

a. How many shares will he own after the reverse stock split?

b. What is the anticipated price of the stock after the reverse stock split?

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?

d. 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?

Explanation / Answer

a)

Numbers shares owned:

= 140÷5

= 28 shares

b)

Price after reverse stock split:

= $2×5

= $10

C)

Price affected by negative reaction:

= $10×80%

= $8

D)

Price affected by negative reaction:

= $10×80%

= $8

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