A reverse split is a procedure that is the exact opposite of a stock split. It involves reducing the number of shares for the corporation while maintaining the same market value. However, the cost per share will be worth more in the market after a reverse stock split occurs.
A reverse stock split is usually performed by companies that are going through some financial difficulty and their price may be too low. Some exchanges require that a company maintain a certain price per share to be listed. For example, the U.S. exchanges require a stock price to be above $1 to be listed. If a company’s stock price were approaching this $1 then the company might perform a reverse split to try and up the price per share and keep the company listed.
Blokbusta Inc. has been a declining business the past couple of years. It’s stock price has steadily declined from the $20 Per share two years ago, and prospects for the company are not looking favorable. The current price per share has dropped to $2 per share. To be listed on the exchange that it is currently on the price per share must be listed at least $1. Worried that Blokbusta might fall below the $1 mark before it can turn around the company, Blokbusta performs a reverse split of 10 to 1. There are currently 100,000 shares outstanding. What is the new stock price?
The current market value of the stock is $200,000 (100,000 shrs. * $2/shr.)
The new amount of shares will be 10,000 (100,000/10)
Thus the new price per share will be $20 per share ($200,000/10,000 shrs.)
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