Price Weighted Index

[ken_griffey_jr]

Any thoughts on how to deal with stock splits?

For instance,

1) On Jan 1. 2008

You have one stock of the following stocks:

Company A @ $40
Company B @ $50
Company C @ $60

Denominator is 3.
Index is (40 + 50 + 60) / 3 = 50

2) July 1. 2008
Company C does a 3 - to - 1 split.


... My question to you guys:
1) What's the new denominator (and how do you figure it out!!!!)
2) what's the new index value? (price weighted)

 

[SkipE99]

denominator increases to 9? calculate same way? not sure

 

[ken_griffey_jr]

Hmm..yeah, i'm not exactly sure either. And I have a feeling that this will be on the exam, too.

 

[jrs130]

divide the denoninator of that stock by the split...so say you had two stocks, each 50, you would get a price of 50 before split. After a 3 for 1 split, your numerator is now 50+16.66 (the 16.66 is 50/3) and your denominotor is 1+.333 (.333 is 1/3) which still equals 50

 

[daj224]

you divde price of stock A by 3 then follow the same procedure you used before. Add em up and ivided by NEW divisor

 

[mcf]

Conceptually, change the denominator to the number that results in no change in the value of the index post split.

 

[ken_griffey_jr]

Right, so the resulting denominator would be 2.33, and the index would stay at $50...

This sounds logical - and it's what I assumed - but it didn't work for a Book 6 question. I believe it's in Exam 3 pm...

not too sure if you guys came across this, too

 

[mib20]

(40+50+60)/3 = 50. After the split...(40+50+20)/X = 50. Solve for X and you get 2.2. The denominator must change in order to keep the index level the same.

 

[ken_griffey_jr]

Thanks, mib20.

For some reason, that didn't click before. ...but i get it now. thanks!