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Assume that you construct a price weighted index of 30 stocks.The sum of the prices...

Assume that you construct a price weighted index of 30 stocks. The sum of the prices of these stocks is $2000. The divisor for this index is 30, and the value of this index is 100. Now assume that one of the 30 stocks, with an average price of $100, has a three-for-one stock split while the value of other stocks remains unchanged.

a) If you make no adjustments to the index, what will be the new value of the index?

b) What does the new divisor have to be to keep the value of the index unchanged at 100?

Solutions

Expert Solution

Answer A

If no adjustment is made to the index, then New Value of the Index will (2000-100+100/3 = 1933.33). Also we have to calculate the new divisor to adjust the index.

Answer B

Stocks before Split = 30

Stocks after Split    = 30

Price Before Split = 2000

Price after Split     = 1933

Index = Price / Divisor

Old Divisor

Index = 2000 / D

100 = 2000 / D

D = 20

New Divisor

Index = 1933 / D

100    = 1933 / D

D      = 19.33

jeff jeffy answered 2 years ago
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