Question

Stock Price X Y Z 50 80 | 30 Shares Outstanding 300 800 | 1000 Given the above table, what would happen to the value-weighted index if stock “Y” is split 2 for 1?

Answer 1

Answer:

Stock split results in increase in number of shares but with corresponding decrease in price per share. As a result, market capitalization remains unchanged.

In the given case, market capitalization of stock “Y” is as follows:

Number of shares = 800

Price per share = 80.

Market capitalization= 800*80= 64,000

A 2 for 1 split in will increase the number of shares from 800 to 1600. But simultaneously the price per share will decrease from 80 to 40. As a result, market capitalization will remain unchanged as follows:

Number of shares = 1600

Price per share = 40.

Market capitalization= 1600*40= 64,000

In a value-weighted index, components (shares forming part of the index) are weighted according to the total market value of such shares outstanding at any given point of time.

Since stock split does not alter the market capitalization, it will have no impact on the value-weighted index.

Hence there will be no change in the value weighted index because of the split of stock “Y” as stated.