Question

A price-weighted index consists of four stocks. Here are their

prices: PA=$ 16; PB=$ 33; PC= $
24; PD= $ 36
Stock C has a 2:1 stock split. What will be the new divisor?

Answer 1

The current divisor is the sum of the stock prices, which is:

D = 16 + 33 + 24 + 36 = 109

After the 2:1 stock split, the price of stock C will be halved, and the new price will be:

PC' = 24 / 2 = 12

The prices of the other stocks remain the same. The new sum of the stock prices is:

16 + 33 + 12 + 36 = 97

To keep the index level constant, we need to adjust the divisor so that:

16 + 33 + 12 + 36 = Index Level x New Divisor

The index level is not given, but it doesn't matter. We can solve for the new divisor:

New Divisor = (16 + 33 + 12 + 36) / Index Level

So the new divisor is (16 + 33 + 12 + 36) divided by the index level.