Question

Global Stock Index is a value weighted index with just 2 stocks in the index: ABC stock and XYZ stock. ABC ended 2005 at a price of $55 and had 1 million shares outstanding. XYZ stock ended 2005 at a price of $32 and had 4 million shares outstanding. ABC had a 2-for-1 split in 2006 at a new price of $27.50. By the end of 2006 ABC closed at $29 and XYZ stock closed at $35 for 2006. Calculate the new value of the index. (12 Marks)

Answer 1

The new value of the Global Stock Index is $195 million after the split in 2006.

Step-by-step explanation:

The value of a Global Stock Index is calculated by taking into account the prices and shares outstanding of the stocks in the index. In this case, the Global Stock Index has only two stocks: ABC and XYZ. To calculate the new value of the index, we need to consider the changes in the prices and shares outstanding of these stocks.

First, let's calculate the initial value of the index in 2005. The value of ABC stock is $55 and it has 1 million shares outstanding, so the market capitalization of ABC is $55 million. The value of XYZ stock is $32 and it has 4 million shares outstanding, so the market capitalization of XYZ is $128 million.

The initial value of the index is the sum of the market capitalizations of ABC and XYZ, which is

$55 million + $128 million = $183 million.

Now, let's calculate the new value of the index in 2006 after the split. After the 2-for-1 split, ABC has 2 million shares outstanding and its price is $27.50.

The market capitalization of ABC is 2 million shares x $27.50 = $55 million. The value of XYZ stock is still $35 and it has 4 million shares outstanding, so the market capitalization of XYZ is $140 million.

The new value of the index is the sum of the market capitalizations of ABC and XYZ, which is

$55 million + $140 million = $195 million.