The table below reports the closing market prices (P) and shares outstanding (SO
ID: 2613402 • Letter: T
Question
The table below reports the closing market prices (P) and shares outstanding (SO) for two stocks: ABC and XYZ. Note that stock XYZ has a 3 for 1 stock split which may, or may not, impact index construction. What divisor would we use in constructing the Price-Weighted Index at time period 1?
Period
ABC
XYZ
P
SO
P
SO
1
45.00
110
112.00
300
2
47.00
110
119.00
300
3
49.00
110
41.33
900
0.7156
1.0883
1.6930
2.0000
Period
ABC
XYZ
P
SO
P
SO
1
45.00
110
112.00
300
2
47.00
110
119.00
300
3
49.00
110
41.33
900
Explanation / Answer
Compute the divisor would we use in constructing the Price-Weighted Index at time period 1.
In the absence of a split, stock XYZ would sell for 112, and the value of the index would be:
(45 + 112)/2 = 78.50
After the split, stock C sells at 119. Therefore, we need to set the divisor (d) such that:
78.50 = (47+119)/d
d = 166 / 78.5
d= 2.11
Divisor for the price-weighted index in year 1 = 2.11
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