The following three defense stocks are to be combined into a stock index in Janu

Question

The following three defense stocks are to be combined into a stock index in January 2013 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance): Suppose that Douglas McDonnell shareholders approve a 3-for-1 stock split on January 1, 2014.

What is the new divisor for the index? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

Calculate the rate of return on the index for the year ending December 31, 2014, if Douglas McDonnell’s share price on January 1, 2015, is $32.40 per share. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

The following three defense stocks are to be combined into a stock index in January 2013 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance): Suppose that Douglas McDonnell shareholders approve a 3-for-1 stock split on January 1, 2014.

Explanation / Answer

Share price after split = 91/3 =30.333

Index value on 1/1/14, without the split is = (91+52+73)/3 =72

New divisor (30.333+52+73)/d=72

New divisor   =(30.333+52)/72   =2.157

Index Value January 1, 2015 =( 32.40+66+87)/2.157

2014 return (85.952-72)/72 =19.368

Share price after split = 91/3 =30.333

Index value on 1/1/14, without the split is = (91+52+73)/3 =72

New divisor (30.333+52+73)/d=72

New divisor   =(30.333+52)/72   =2.157

Index Value January 1, 2015 =( 32.40+66+87)/2.157

2014 return (85.952-72)/72 =19.368

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