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Reverse Stock Splits

Course: Investment Planning
Lesson 14: Evaluating Portfolio Performance

Student Question:

Hello! Re: Reverse Splits: When companies decide to do a reverse stock split, does the company always take in the outstanding shares as “treasury stock”? If not, what happens to the outstanding stock that has been taken away? Where does it go on the balance sheet or on the statement of cash flows when looking at that company’s financials? Any insight is very helpful!

Thank you!!
~Deborah

Instructor Response:

Deborah,

That’s an insightful question.  An example may best answer your question.

Let’s say ABC, Inc. is trading at $0.90 per share on the exchange.  Generally, an exchange requires a stock to trade at or above $1.00 to remain listed on the exchange.  ABC, Inc. may do a 1-for-10 reverse split to address the listing requirements.  Assume that the company has 10MM shares outstanding before the reverse split.  After the split the company has only 1MM shares outstanding the stock should be trading around $9.00 per share.

If you had 100,000 shares before the reverse split then you have 10,000 shares after the split.  There would be no treasury shares.  The new shares would simply replace the old shares.

Bruce