Final answer:
The price of the stock will be reduced by 20% when it splits 5 for 4. This is because each share's new price is calculated by dividing the total pre-split value by the new higher number of shares, resulting in a decrease from the original share price. The correct option is A.
Step-by-step explanation:
When a stock splits 5 for 4, this effectively means that the number of shares will increase by a ratio of 5:4. For every 4 shares an investor owns, they will now have 5 shares. To find the percentage reduction in the price of the stock, we need to understand what a stock split does to the price.
Before the split, let's assume there are 4 shares each worth $1. The total value is $4. After the split, there are now 5 shares representing the same total value of $4. The new price of each share will be $0.80 ($4 divided by 5). This represents a reduction in the share price from the original $1 to $0.80.
To calculate the percentage decrease, we use the formula: Percentage Decrease = (Original Price - New Price) / Original Price * 100%
Substituting in our values, we get:
Percentage Decrease = ($1 - $0.80) / $1 * 100% = 0.20 * 100% = 20%
Therefore, the stock price will be reduced by 20% after a 5 for 4 stock split.