In March 2009, Citigroup, a major U.S. based global bank, was in severe financial distress and required significant U.S. government investment. Citigroup announced it would seek shareholder approval for up to a 1 for 30 reverse split. At that time, the stock was perilously close to the $1 a share minimum price required for continued listing on the NYSE. In July 2009, the reverse split had not yet taken place, but the shares were trading at $2.90.
1. If the reverse split were to take place when the share price was $2.90 on the day before the ex dividend date, find the expected stock price after a 1 for 30 split, all other factors remaining unchanged.
2. Comment on the following statement: “Shareholder wealth is negatively affected by a reverse stock split.”