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Series 7 practice questionmediumCorporate Actions — Reverse Stock Splits

A company announces a 1-for-5 reverse stock split. A shareholder who owns 500 shares at $2 per share will have what position after the reverse split?

  1. A2,500 shares at $0.40 per share
  2. B500 shares at $10 per share
  3. C100 shares at $10 per share✓ Correct answer
  4. D50 shares at $20 per share
Explanation

Why C — 100 shares at $10 per share

In a 1-for-5 reverse stock split, every 5 shares are consolidated into 1 share, and the price per share is multiplied by 5. The shareholder's 500 shares become 100 shares (500 / 5 = 100), and the price increases from $2 to $10 per share ($2 x 5 = $10). The total value remains $1,000. Companies often use reverse splits to increase their share price to meet exchange listing requirements or to improve the stock's perception among institutional investors.

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