Legal capital

Lauer Company has 700,000 shares of $1 par value common stock outstanding and 12,000 shares of $100 par value preferred stock outstanding. Earlier in the year, Lauer’s common stock had been selling around $8 per share, but for the past two months, the share price has dropped to $1.25 per share (on average). Lauer is contemplating a one-for-four reverse stock split on its common stock.

Required:

A. What is the legal capital of Lauer Company currently?

B. If Lauer undertakes the reverse stock split, what will the legal capital of the company be following the split?

C. How many common shares will be outstanding and what will the par value be after the split?

D. If Lauer’s strategy is successful, what should happen to the selling price of its common stock following the split?

Solution:

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