Corporate Actions: 4-for-1 Forward Split vs. 1-for-5 Reverse Split Effects
A corporation announces a 4-for-1 forward stock split. Prior to the split, an investor owns 200 shares at a market price of $120 per share ($24,000 total investment). Following the split, what will be the investor's share quantity, price per share, and total investment value?
In a 4-for-1 forward split: Shares increase 4x (200 × 4 = 800 shares), price drops to 1/4th ($120 / 4 = $30.00), and total portfolio value remains UNCHANGED at $24,000.
Complete Analysis & Legal Rationale
In a forward stock split, the number of outstanding shares increases and the price per share decreases proportionally, while the investor's percentage ownership and total aggregate dollar value remain identical: New Shares = 200 × 4 = 800 shares. New Price per Share = $120 / 4 = $30.00. Total Investment Value = 800 × $30.00 = $24,000. (In contrast, option B describes a 1-for-4 reverse split). Forward splits are not taxable events; the investor adjusts cost basis per share.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
In a 4-for-1 forward split: Shares increase 4x (200 × 4 = 800 shares), price drops to 1/4th ($120 / 4 = $30.00), and total portfolio value remains UNCHANGED at $24,000.
Fails to adhere to trade execution and settlement rules regarding B.
Fails to adhere to trade execution and settlement rules regarding C.
Fails to adhere to trade execution and settlement rules regarding D.
Official Standard: In a forward stock split, the number of outstanding shares increases and the price per share decreases proportionally, while the investor's percentage