Question

Phoenix Financial Ltd. has suffered losses in recent years, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $25 per share. How many of the old shares must be given up for one new share to achieve the $25 price? Assume this transaction has no effect on total market value.

Answer 1

Phoenix Financial Ltd.

For one new share to achieve the $25 price, 50 of the old shares must be given up.

Step-by-step explanation:

a) Data and Calculations:

Current stock price = $0.50

Reverse stock split to get the price up to a more "reasonable" level = $25 per share

To calculate the number of shares to be give up $25/$0.50 = 50 shares

b) Reverse stock split takes place when the company wants to shore up the per unit stock price. It consolidates the number of existing shares of stock into fewer, proportionally more valuable and reasonable, share price per unit. There are many reasons for reducing the outstanding shares. It may be that the company is facing some financial distress. Or in this case, management may want "to get the price up to a more reasonable level."