Consider the three stocks in the following table. P, represents price at time t,
ID: 2740852 • Letter: C
Question
Consider the three stocks in the following table. P, represents price at time t, and Q, represents shares outstanding at time t. Stock C splits two -for -one In the last period Calculate the rate of return on a price-weighted index of the throe stocks for the first period (f = 0 to t= 1). (Do not round Intermediate calculations. Round your answer to 2 decimal places.) What will be the divisor for the price-weighted index in year 2? (Do not round Intermediate calculations. Round your answer to 2 decimal places.)Explanation / Answer
Market Capitalization = P * Q = stock price * no of shares outstanding
A market value weighted index is an index in which the components of the index are weighted on the basis of their market capitalization.
Market Value of the index at t=0 = 86 * 100 + 46*200 + 92*200 = 8600 + 9200 + 18400 = 36200
Market Value of the index at t=1 = 92* 100 + 41*200 + 102*200 = 9200+ 8200 + 20400 = 37800
First Period Rate of return = [(37800 - 36200)/36200] * 100 = (1600/36200) * 100 = 4.42%
2) Calculate divisor
Selling price of stock before stock split is 102
The value of the index=(92+102+102)/3=98.67
Divisor D =(92+102+51)/98.67=2.48