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)
denominator increases to 9? calculate same way? not sure
Hmm…yeah, i’m not exactly sure either. And I have a feeling that this will be on the exam, too.
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
you divde price of stock A by 3 then follow the same procedure you used before. Add em up and ivided by NEW divisor
Conceptually, change the denominator to the number that results in no change in the value of the index post split.
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
(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.
Thanks, mib20. For some reason, that didn’t click before. …but i get it now. thanks!