a) Consider a price weighted index with only three stocks. If the stock prices a
ID: 2784820 • Letter: A
Question
a) Consider a price weighted index with only three stocks. If the stock prices are Ghs20, Ghs 30, and GHs 40 and the divisor is 3.0, what is the index level? If the Ghs 40 stock does a 2-for-1 split to Ghs 20, calculate the new divisor?
b) Find below a market value weighted index, with only three stocks. Each stock originally sold 100 shares at GHs 30. Assuming the base index value is 100, what is the value of the index? What happens when the 80 stock has 2-for-1 stock split?
Stock Price (GHs) Share Outstanding A 40 300 B 60 200 C 80 100Explanation / Answer
a) Total Sum of prices of three stocks = 20 + 30 + 40 = 90
Index Level = Sum / Divisor = 90 / 3 = 30
If the stock goes for 2 for 1 split, new sum = 20 + 30 + 20 = 70
New Divisor = New Sum / Index = 70 / 30 = 2.33
b) Market Value at the beginning = 100 x 30 x 3 = 9,000
Market Value today = 40 x 300 + 60 x 200 + 80 x 100 = 32,000
If the index was 100 at the beginning, index today = 32,000 / 9,000 x 100 = 355.56
If Stock C goes for 2-for-1 split, the stock price = 80 / 2 = 40 and the no. of shares = 100 x 2 = 200. Hence, the market value will remain constant and so will the index level be.
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