SIE practice questionmediumReverse Stock Splits
A company executes a 1-for-5 reverse stock split. An investor who owned 500 shares at $2 per share will now own:
- A100 shares at $10 per share✓ Correct answer
- B2,500 shares at $0.40 per share
- C50 shares at $20 per share
- D500 shares at $10 per share
Explanation
Why A — 100 shares at $10 per share
In a 1-for-5 reverse split, every 5 shares are consolidated into 1 share, and the price per share increases proportionally. 500 shares / 5 = 100 shares. Price per share: $2 x 5 = $10. Total value remains the same: 500 x $2 = $1,000 = 100 x $10. Reverse splits are often used by companies with very low share prices to meet exchange minimum listing requirements or to improve the stock's perception.
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