Question

# Problem 5-1 Price-Weighted Divisor (LO4, CFA2) Able, Baker, and Charlie are the only three stocks in...

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.)

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)