Consider the three stocks in the following table. Pt represents price at time t,
ID: 2811216 • Letter: C
Question
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. P0 Q0 P1 Q1 P2 Q2 A 83 100 88 100 88 100 B 43 200 38 200 38 200 C 86 200 96 200 48 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). (Do not round intermediate calculations. Round your answer to 2 decimal places.) Rate of return % b. 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.) Divisor
Explanation / Answer
Solution:
a) At t=0 , value of index = (83+43+86)/3= 70.67
At t=1, value of index= (88+38+96)/3= 74
Rate of Return = [74-70.67]-1= 4.71%
b) In the absence of a split, Stock C would sell for 96
Value of index = 88+38+96/3= 74
After the split , stock C sell for 48
Divisor= (88+38+48)/d= 74
174/d=74
d= 174/74
Divisor= 2.35