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 2-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 $23.70 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 2-for-1 stock split on January 1, 2014.

Explanation / Answer

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

Index value on January 1, 2014 prior to split = (66+28+52)/3 = 48.6667

After Split

(33+28+52)/d = 48.6667

d = 113/48.6667

d = 2.322

Answer

New divisor : 2.322

b.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 $23.70 per share. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Index Value  on January 1, 2015 = (23.70+42+68)/2.322

Index Value  on January 1, 2015 = $ 57.58

Rate of return on the index for the year ending December 31, 2014 = (57.58 - 48.6667)/48.6667

Rate of return on the index for the year ending December 31, 2014 = 18.32%

   
Answer

  Rate of return 18.32%

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