Question

# A price-weighted index consists of stocks A, B, and C which are priced at $50,$35,...

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 #### Homework Answers 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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