A price-weighted index consists of stocks A, B, and C which are priced at $50, $35, and $15 a share, respectively. The current index divisor is 2.75. What will the new index advisor be if stock A undergoes a 5-for-1 stock split?
Before stock Split
Price weighted Index = Sum of the price of all the stocks/Divisor = (50+35+15)/2.75 = 36.3636363636364
After stock Split
5-for-1 stock split means that the one stock of A is split into 5 stock. Therefore, the new stock price of A is:
New price of stock A = $50/5 = $10
The price-weighted Index will not change, only the divisor will change
Price Weighted Index = Sum of prices of the stock/New Divisor = 36.3636363636364
60/New Divisor = 36.3636363636364
New Divisor = 60/36.3636363636364 = 1.65
Answer -> New Divisor = 1.65
Get Answers For Free
Most questions answered within 1 hours.