Question

In: Finance

Consider the following three stocks: Stock PriceNumber of shares outstanding Stock A$40200 Stock B$70500 Stock C$10600...

Consider the following three stocks:

Stock PriceNumber of shares outstanding

Stock A$40200

Stock B$70500

Stock C$10600

Assume at these prices that the value weighted index constructed with the three stocks is 490.What would the index be if stock B is split 2 for 1 and stock C 4 for 1?

265

430

355

490

1000

Solutions

Expert Solution

After Stock Split below will be the Stock PriceNumber of shares outstanding

Stock A - Price is $40 , share outstandng is 200

Stock B - Price is $35 , share outstandng is 1000, since in split of 2 for 1 , The stock price will be half and share outstanding will be double.

Stock B - Price is $2.5 , share outstandng is 2400, since in split of 4 for 1 , The stock price will be one fourth and share outstanding will be four times

Total Market capitalisation before split will be

Sum of price * Share oustanding for all three stocks

Market capitalisation of Stock A =40*200= 8000

Market capitalisation of Stock B =70*500= 35000

Market capitalisation of Stock C =10*600= 6000

Total will be 49000

Total Market capitalisation after stock split will be

Sum of price * Share oustanding for all three stocks

Market capitalisation of Stock A =40*200= 8000

Market capitalisation of Stock B =35*1000= 35000

Market capitalisation of Stock C =2.5*2400= 6000

Total will be 49000

Since there is no change in the total of market capitalisation, there will be no change in value weighted index. So it will remain at the level of 490.

.


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