Question

Widget Co has a market capitalization of $125M. It does a 5-for1 stock split. It then does a 1-for-25 reverse stock split. Finally, it does a 35-for-1 stock split. Nothing else changes. What's the new market cap?

Answer 1

The new market capitalization of Widget Co remains at $125M after a series of stock splits, as these actions are neutral to the overall value of the company when nothing else changes.

Step-by-step explanation:

The subject of this question is related to stock splits and their impact on market capitalization. Market capitalization is a measure of a company's value calculated by multiplying the stock's price by the total number of outstanding shares. The student is asked to determine the new market cap of Widget Co after a series of stock splits, assuming that only the number of shares changes and not the market value of the company.

Initially, the market cap is $125M. After a 5-for-1 stock split, the number of shares would increase by a factor of 5, but the price per share would decrease by the same factor, leaving the market cap unchanged. Then, a 1-for-25 reverse stock split reduces the number of shares by a factor of 25, with a corresponding increase in the share price, again keeping the market cap constant. Finally, a 35-for-1 stock split increases the number of shares by a factor of 35, with a proportional decrease in the share price. Each of these actions is neutral to the market capitalization, which remains at $125M.