As you are caught in traffic yet again on the way home, you grab your steering w

Question

As you are caught in traffic yet again on the way home, you grab your steering wheel in a white-knuckled grip of frustration and look to the sky, imagining how cool it would be to have a flying car. Right then and there, you decide to start a Flying Car Index, which is the price-weighted index of the five largest flying car development companies. The prices of the five stocks are 45, 62, 60, 94, 32 per share, respectively, when the last company decides to have a 2 for 1 stock split, and its share price halves. What should be the new divisor for your index so that its value is unaffected by the event? Enter answer accurate to 2 decimal places.

Explanation / Answer

The price weighted index before split = (45 + 62 + 60 + 94 + 32)/5 = 58.6

so now the last company stock prices are getting split so its stock price will be 16

so earlier our divisor was 5 no lets say our new divisor is X.

that means to keep the same price weighted index, which is currently 58.6.It will be

58.6 = (45 + 62 + 60 + 94 + 16)/ X

X = (45 + 62 + 60 + 94 + 16)/ 58.6

X = 4.73

so, the new divisor for the index is = 4.73

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