Question

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?

A. 0.40

B. 0.65

C. 1.00

D. 1.65

Answer #1

Before stock Split

Stock | Price |

A | 50 |

B | 35 |

C | 15 |

Price weighted Index = Sum of the price of all the stocks/Divisor = (50+35+15)/2.75 = 36.3636363636364

After stock Split

Stock | Price |

A | 10 |

B | 35 |

C | 15 |

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**

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