Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesMedium
A customer who holds 100 shares of XYZ stock at $80 per share receives a notice that the company has declared a 1-for-4 reverse stock split. After the split, how many shares will the customer own, and what will be the new cost basis per share?
- A25 shares at $320 per share.
- B50 shares at $160 per share.
- C100 shares at $80 per share.
- D400 shares at $20 per share.
Show answer & explanationAnswer & explanation
Correct answer: A. 25 shares at $320 per share.
In a 1-for-4 reverse stock split, the number of shares is divided by 4, and the price per share is multiplied by 4. So, 100 shares / 4 = 25 shares. The original cost basis was $80 per share, so $80 x 4 = $320 per share. The total value of the investment remains the same ($100 x $80 = $8,000; $25 x $320 = $8,000).
Why the other options are wrong
- B. This calculation is incorrect for a 1-for-4 reverse split.
- C. This represents the original position before the split.
- D. This describes a 4-for-1 forward stock split, not a reverse split.
Reverse Stock Split
A corporate action where a company reduces the number of its outstanding shares by consolidating them, thereby increasing the price per share proportionally.
- Increases the price per share.
- Decreases the number of shares outstanding.
- Total market value of the investor's holding remains the same.
Memory trick: Reverse Split: 'Fewer shares, higher price, same value.'