Peninsula Minerals Ltd.’s share capital consists of an unlimited number of common shares, with 9.3 million outstanding. After some early successes, the company has failed to locate new mineral deposits and has also decreased its estimates of the amount of minerals in existing mines. As a result, earnings per share and the share price have been declining and are currently $0.17 and $0.68 per share, respectively. Peninsula Minerals is considering a reverse stock split (one that decreases the number of shares outstanding instead of increasing them) of 1:3.
a. What is the current price/earnings ratio?
b. What is the current market value of the company?
c. Why would any company want to reverse split its shares? What would be the likely effect of the reverse split on the EPS and share price?
d. Would repurchasing shares achieve the same result as a reverse split? What is the likely reason that management prefers a reverse split over repurchasing shares?
e. If the board of directors approves the reverse split, how many shares will be outstanding?
f. Assuming the price/earnings ratio is the same after the reverse split as it was before the split, what will Peninsula Minerals’ share price be after the reverse split?