Consider the three stocks in the following table. Pe represents price at time t,
ID: 2814424 • Letter: C
Question
Consider the three stocks in the following table. Pe represents price at time t, and Q represents shares outstanding at time t.Stock C splits two-for- one in the last period. 89 100 39 200 88 200 98 200 49 400 100 200 84 89 39 100 200 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (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 27 (Do not round intermediate calculations. Round your answer to 2 decimal places.) DivisorExplanation / Answer
a)
At t=0,
Index0 = Price ( A +B+C) / 3
=( 84 +44 + 88) / 3
= 72
At t=1,
Index1 = ( 89 + 39+ 98)/ 3
= 75.333
Return = (75.333-72) / 72
= 4.63%
(b)
Divisor for period 1 stock index is 3. but after stock split the divisor has to be changed
for period 1, index1 = 75.333
Had prices of A,B,C been the same and C went for 2 for 1 split,
75.333 = ( 89 + 39 + 98/2 ) / new divisor
new divisor = 177/ 75.33 = 2.35
new divisor o be used after stock split in period 2 is 2.35