CFA Practice Question

CFA Practice Question

The following 4 stocks are the components of a price-weighted index (series). Prices and # outstanding on January 1 are given in the table below. After close of trade on January 1, there is a 4 for 1 stock split for stock P. Price at the end of January 2 are also given in the table below.

Stock | Price (Jan 1) | # Outstanding (Jan 1) | Price (Jan 2)
M | $12 | 2 M | $14
N | $20 | 4 M | $18
O | $32 | 3 M | $32
P | $16 | 5 M | $5

As of Jan 1 there were no prior splits in any of the stocks. What is the value of the price-weighted index at the end of January 2?
A. 20.80
B. 21.31
C. 20.29
Explanation: First calculate the price index pre-split as the sum of the prices on Jan 1 divided by 4 (as there had been no split till Jan 1). Next reduce only the price of stock P and calculate the new denominator which will result in the index having the same value as before (while still using Jan 1 prices). Finally use the new denominator on Jan 2 prices to find value of index on Jan 2.

User Contributed Comments 5

User Comment
aashishb (12+20+32+16)/4=20
P split to 4 share ==> 16/4 = 4
(12+20+32+16)/denominator=20 ==> 3.4

(14+18+32+5)/3.4 = 20.29
steph73 thanks
zzhumanov when calculating new denominator the price of P is 4 (not 16).
birdperson thanks aashishb
AN - throw out some #s in the answer please
birdperson zz is right

1. (12 + 20 + 32 + 16)/4 = 20.
2. new denominator calculation: (12+20+32+4)/20 = 3.4
3. (14 + 18 + 32 + 5) / 3.4 = 20.29
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