Question

Problem 5-1 Price-Weighted Divisor (LO4, CFA2)

Able, Baker, and Charlie are the only three stocks in an index. The stocks sell for $38, $200, and $106, respectively. If Baker undergoes a 3-for-2 stock split, what is the new divisor for the price-weighted index? (Do not round intermediate calculations. Round your answer to 5 decimal places.)

Answer 1

Initial stock price of Able is $38, Baker is $200 and Charlie is $106.
The value of a price-weighted index consisting of these three stocks= ($38+$200+$106)/3=$114.6666667

After 3-for-2 split, the new stock price of Baker will be $200/(3/2)=$133.3333333
Now, the index divisor needs to be adjusted so that the index value would remain at $114.6666667
Let the new divisor be "x"
So, ($38+$133.3333333+$106)/x=$114.6666667

=>277.3333333/x=114.6666667
=>277.3333333/114.6666667=x
=>x=2.41860465
So, the value of new divisor for the price-weighted index=2.41860 (rounded up to 5 decimal places)