NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsMedium
An investor owns 100 shares of XYZ common stock, currently trading at $50 per share. XYZ announces a 1-for-2 reverse stock split. After the split, what will be the investor's number of shares and the approximate price per share?
- A200 shares at $25 per share
- B50 shares at $100 per share
- C100 shares at $50 per share
- D200 shares at $100 per share
Show answer & explanationAnswer & explanation
Correct answer: B. 50 shares at $100 per share
In a 1-for-2 reverse stock split, the number of shares is divided by 2, and the price per share is multiplied by 2. So, 100 shares / 2 = 50 shares, and $50/share * 2 = $100/share. The total value of the investment remains the same (100 * $50 = $5,000, and 50 * $100 = $5,000).
Why the other options are wrong
- A. This describes a 2-for-1 forward stock split, not a reverse split.
- C. This implies no change, which is incorrect after a split.
- D. This would be a 2-for-1 forward split with a doubled price, which is self-contradictory and incorrect.
Reverse Stock Split
A corporate action where a company reduces the number of its outstanding shares, thereby increasing the market price per share.
- Total market value of the investment remains unchanged.
- Often done to increase share price to meet exchange listing requirements.
- Expressed as '1-for-X' where X is the number of old shares for each new share.
Memory trick: Reverse split: shares shrink, price swells, value stays.