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A stock index consists of 2 stocks: Company A has 50 shares outstanding at $3 each
A stock index consists of 2 stocks: Company A has 50 shares outstanding at $3 each. Company B has 10 shares outstanding valued at $12 each. If the price of Company A’s stock increases to $5 per share, and Company B’s stock splits 2 for 1 and is priced at $8,
Calculate the price index and the value index before the split and after the split
What is the new divisor for the price index after the split.
Expert Solution
ANSWER
| COMPANY | SHARES O/S | INITIAL PRICE | SHARES O/S | MARKET PRICE |
| A | 50 | 3 | 50 | 5 |
| B | 10 | 12 | 20 | 8 |
| b) price weighted index | ||||
| value at initiation= 3 + 12 / 2 | ||||
| =7.5 | ||||
| new divisor = 3 + 8 / 7.5 | ||||
| =1.466667 | ||||
| value today = 5 + 8 / 1.467 | ||||
| =8.863636364 | ||||
| index value = 7.345588 / 6.75 | ||||
| =118.18 |
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