Assume at these prices the value-weighted index constructed with the three stocks is 490.What would the index be if stock B is split 2 for 1 and stock C 4 for 1?
A)265
B)430
C)355
D)490
E)1000

Question

Quizplus · Accepted Answer

Since the index is value-weighted, the total value of the index before the stock splits is:
A: 100 shares x $10/share = $1000
B: 50 shares x $20/share = $1000
C: 25 shares x $30/share = $750
Total value = $2750
Dividing by the divisor (which we don't know yet) gives us an index level of 490.
After the stock splits, the number of shares will change but the total value of each stock will remain the same. So we can calculate the new total value of the index as follows:
A: 100 shares x $10/share = $1000
B: 100 shares x $10/share = $1000
C: 100 shares x $7.50/share = $750
Total value = $2750
To calculate the new divisor, we divide the old total value by the new total value: 2750/2750 = 1
Therefore, the index level after the stock splits will be the same as before: 490.

Assume at These Prices the Value-Weighted Index Constructed with the Three