### 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 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