A market value weighted index has three stocks in it, call them A, B, and C, pri

Question

A market value weighted index has three stocks in it, call them A, B, and C, priced at 54, 60, and 27 per share. Each firm has 339, 376 and 421 thousand shares outstanding, respectively. The value of the index at close of trading day is 834. At this time, the index decides to remove stock C from the index, and in its place to insert stock D. Stock D has a closing price of $85 per share, and 196 thousand shares outstanding. What is the new value of the index divisor, after the substitution? Enter answer accurate to two decimal places.

Explanation / Answer

Weighted average Price of shares = 54*339+ 60*376 + 27*421/(339+376+421) = 45.97

If the initial value is 100, then value of Stock divisor = 834/100 = 8.34

Weighted Average Price of shares after addition of D and removal of C= (54*339+60*376 + 85*196)/339+376+196 = 63.14

New Value of Index divisor = 63.14*8.34/45.97 =11.45

New Stock Index value = 11,450

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