Reverse Stock Split | Reverse split stock | What is a reverse stock split | Financial Management | Management Notes
Table of Contents
Reverse Stock Split is the action taken by the company to reduce the firm’s number of outstanding shares in the market because of the falling share price of the company in the market.
When the number of company’s outstanding shares in the market is reduced,
- It increases the Par Value per share and Market Value per share.
- It also increases the Earnings Per Share (EPS) and Dividend Per Share (DPS.
Note: There will be no effect on value of Common Stock or we can say Total Shareholders’ Equity Account remains Constant.
Example : ABC Company
Let’s take an example to illustrate the effect of reverse stock split and justify the above mentioned points.
ABC Company Total Shareholder’s Equity Account [Before Reverse Stock Split] | |
Particulars | Amount in Rs |
| Common Stock [ 20,000 Shares @ Rs 100] Additional Paid in Capital Retained Earnings | 2,000,000 1,000,000 4,000,000 |
Total Shareholder’s Equity | 7,000,000 |
Let us assume that ABC Company announces 2-for-5 Reverse Stock Splits. After this announcement,
- The outstanding shares of ABC company reduced from 20,000 Shares to 8,000 Shares [20,000 shares *2/5].
- Par Value of Shares of ABC company increased from Rs 100 to Rs 250 [ Rs 100*5/2].
ABC Company Total Shareholder’s Equity Account [After Reverse Stock Split] | |
| Particulars | Amount in Rs |
| Common Stock [ 8,000 Shares @ Rs 250] Additional Paid in Capital Retained Earnings | 2,000,000 1,000,000 4,000,000 |
| Total Shareholder’s Equity | 7,000,000 |