Association for Financial Professionals (AFP) Practice Exam

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Why might a company initiate a reverse stock split?

  1. To increase share liquidity

  2. To lower the stock price for greater accessibility

  3. To prevent shares from being delisted

  4. To enhance dividend payouts

The correct answer is: To prevent shares from being delisted

A company may initiate a reverse stock split primarily to prevent its shares from being delisted. This situation often arises when a company's stock price falls below the minimum price required for listing on a stock exchange, such as the New York Stock Exchange or NASDAQ. By consolidating shares through a reverse stock split, the company reduces the total number of shares outstanding while increasing the price per share proportionately. This adjustment can help bring the stock price back above the required threshold, thus avoiding delisting, which could have dire implications for the company's visibility and ability to raise capital. While other considerations exist for reverse stock splits, such as enhancing the perception of the company's stock value, the immediate and pressing concern is often compliance with exchange regulations to maintain a listing.