Question

Kaylor's Tool Shoppe has 16,000 shares of stock outstanding at a market price of $2 a share. Which one of the following stock splits should the firm declare if it wants to increase the stock price to exactly $15 a share? Ignore any taxes or market imperfections.

a.15-for-2 stock split
b.8-for-1 stock split
c.1-for-7 reverse stock split
d.2-for-15 reverse stock split
e.1-for-8 reverse stock split

Answer 1

A 1-for-7 reverse stock split will best increase Kaylor's Tool Shoppe's stock price towards the target $15 a share, by reducing the number of shares and proportionally increasing the share price. However, this split will result in a stock price of $14, which is the closest to $15 among the provided options.

The correct option is c.

Step-by-step explanation:

To determine which stock split will increase Kaylor's Tool Shoppe's stock price to exactly $15 a share from the current price of $2 a share, we must identify the split ratio that would result in an increase in the stock price by a factor of $15/$2 = 7.5. From the given options, a 1-for-7 reverse stock split would reduce the number of shares outstanding, potentially increasing the price per share. In a reverse stock split, the number of shares decreases by the denominator of the ratio, and the stock price increases proportionally.

Here's how it works: In a 1-for-7 reverse split, for every 7 shares a shareholder currently owns, they would then own just 1 share after the split. Since Kaylor's Tool Shoppe has 16,000 shares, a 1-for-7 reverse split would reduce the shares to 16,000 / 7 ≈ 2,286 shares. The new share price would then be 7 times the old price (because there are 7 times fewer shares), so $2 * 7 = $14. The closest we can get to the desired $15 share price using the provided options is $14 with a 1-for-7 reverse stock split. However, to note, no exact split given in the options will increase the price to exactly $15, but the 1-for-7 reverse stock split brings it closest to that target.