An index is made up of Stock A, Stock B, and Stock C. The prices of the three stocks are $45, $126, and $64. If Stock B undergoes a 3-for-1 stock split, what is the new index divisor?

Question

Quizplus · Accepted Answer

Before the stock split, the index divisor is calculated as the sum of the stock prices divided by a preset number, usually 1. For simplicity, let's assume the preset number is 1, so the initial index divisor is (45+126+64)/1 = 235.

After the 3-for-1 stock split, the number of outstanding shares of Stock B triples, but the price per share reduces to a third of the original price. Thus, the new price of Stock B is $126/3 = $42.

The new index divisor is now calculated by dividing the total new prices of the three stocks by the old index value, which is the initial index divisor before the stock split. So the new index divisor = (45+42+64)/235 = 0.771489.

Rounded to five decimal places, the closest option is B: 1.92766.

An Index Is Made Up of Stock A, Stock B