Question

Able, Baker, and Charlie are the only three stocks in an index. The stocks sell for $93, $351, and $74, respectively. If Baker undergoes a 2-for-1 stock split, what is the new divisor for the price-weighted index?

Answer 1

Answer:

1.98359

Explanation:

Given that :

Index have three stocks and the prices of those sticks are $93, $351, and $74, respectively. Usually what stock split does is to increase he number of share outstanding without any interference with the original total amount of money.

So if Baker ( the company B ) undergoes 2:1 split stock, it typically implies that one share will be divided by two shares.

New divisor for price - weighted index is given by the formula:

Price weighted index = $\frac{Price_{A} + Price _{B afterstockspit} +Price_{C}}{\frac{Price_{A} + Price _{B beforestockspit} +Price_{C}} {Number of Stocks } }$

Price of stock B before stock split is = $351

To determine the new stock B after stock split; we have

Price weighted index₀ = $\frac{Price _{B before stock split}}{Stocl split ratio}$

= $\frac{351}{2}$

= $175.5

The new divisor for the price weighted index is as follows;

Price weighted index = $\frac{Price_{A} + Price _{B afterstockspit} +Price_{C}}{\frac{Price_{A} + Price _{B beforestockspit} +Price_{C}} {Number of Stocks } }$

Price weighted index = $\frac{93+175.5+74}{ \frac{93+351+74}{3} }$

Price weighted index = 1.98359

Thus, the new divisor for the price weighted index = 1.98359

Answer 2

Answer:The New Divisor for the price weighted index = 4.29 (rounded off to two decimals)

Explanation:

Able stock = $93

Baker = $351

Charlie = $74

Price Weighted Index Formula = sum of company share prices/number of companies

Price Weighted Index Formula = ($93 + $351 + $74)/5

Price Weighted Index = $425/5 = $85

The Price Weighted index before share split = $85 and the divisor is 5

Calculating the New Divisor for the Price weighted index

Let The new divisor for the price weighted index be α

Price of Barker stock after sare split = $351 x 1/2 = $175.5

Price Weighted Index = 85

Price Weighted Index= ($93 + $175.5 + $74)/α = $85

($93 + $175.5 + $74)/α = $85

cross multiply

$85α = ($93 + $175.5 + $74)

$85α = $342.5

α = $342.5/$85 = 4.29411765

α = 4.29

The New Divisor for the price weighted index = 4.29 (rounded off to two decimals)