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 $26.15 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) Share Price after Stock Split = $36 ($72/2) 2 for one stock Split Douglas Mcdonnel january1, 2014: Index Value = $72+$40+$65/3 $72+$40+$65/3 59 d= $59 Index Value without the Split is $59 ($36+$40+$65)d=$59 ($36+$40+$65)/59 2.389831         2.390 a) New Divisor          2.390 b) Rate of return on the index for the year ending 31/12/2014, if Douglas Mcdonnel share price on january 1,2015 is $26.15 per Share 01.01.2015 Index Value ($26.15+$54+$79)/2.390 Index Value in 2015 is = 66.590 From this Return of 2014 = (66.590-59)/59 12.86441 b) 12.86%

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