Question

QUESTION 3 A company wants to create a market value-weighted index from a group of stocks with a total market capitalization of $600,000. If the desired initial index value is 1,500, then what is the divisor? 400 QUESTION 4 A constituent stock of a market value-weighted index splits 2-for-1. Which one of the following best describes how the stock index changes? O The total market capitalization increases, divisor decreases, but the index value does not change following the stock split. O The total market capitalization and the divisor do not change, but the index value increases following the stock split. The total market capitalization, divisor, and the index value do not change following the stock split. The total market capitalization decreases, divisor increases, but the index value does not change following the stock split. The total market capitalization and the divisor do not change, but the index value decreases following the stock split.

Answer 1

Share	Outstanding shares (Base year)	Base price	Current price
A	800	50	80
B	500	40	60
C	300	60	100

Assumed base index is 1000

Share	Outstanding shares (Base year)	Base price	Base Value	Current price	Current Value
A	800	50	40000	80	64000
B	500	40	20000	60	30000
C	300	60	18000	100	30000
	Total Value		78000		124000
Market value-weighted index (124000/78000)*100					158.97

Divisor = 124000/1000 = 124

Suppose, stock B has spit 2 for 1. That means now total B stocks are 1000.

Share	Outstanding shares (Base year)	Base price	Base Value	Current price	Current Value
A	800	50	40000	80	64000
B	500	40	20000	60	60000(WN)
C	300	60	18000	100	30000
	Total Value		78000		154000
Market value-weighted index (154000/78000)*100					197.44

Working Note: 60*1000(new shares) = 60000

Divisor = 154000/1000 = 154

Option 3 is the answer. That is, the

total market capitalization will increase because the number of share/stocks has doubled in amount.

Divisor will increase because the market capitalization has increased.

The index will also increase.