Chapter 2 – problem set

1. Turn to Figure 2.8 and look at the listing for General Dynamics.

a. How many shares could you buy for $5,000?

1. a. You could buy: $5,000/$67.32 = 74.27 shares

b. What would be your annual dividend income from those shares?

b. Your annual dividend income would be: 74.27  $1.52 = $112.89

c. What must be General Dynamics earnings per share?

c. The price-to-earnings ratio is 11 and the price is $67.32. Therefore:

$67.32/Earnings per share = 11  Earnings per share = $6.12

d. What was the firm’s closing price on the day before the listing?

d. General Dynamics closed today at $67.32, which was $0.47 higher than yesterday’s price.
Yesterday’s closing price was: $66.85
2. Consider the three stocks in the following table. P t represents price at time t, and Q t represents shares
outstanding at time t. Stock C splits two for one in the last period.

P0 Q0 P1 Q1 P2 Q2
A 90 100 95 100 95 100
B 50 200 45 200 45 200
C 100 200 110 200 55 400

a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1).

2. a. At t = 0, the value of the index is: (90 + 50 + 100)/3 = 80

At t = 1, the value of the index is: (95 + 45 + 110)/3 = 83.333
The rate of return is: (83.333/80)  1 = 4.17%

b. What must happen to the divisor for the price-weighted index in year 2?

b. In the absence of a split, Stock C would sell for 110, so the value of the index would be: 250/3 =
83.333
After the split, Stock C sells for 55. Therefore, we need to find the divisor (d) such that: 83.333
= (95 + 45 + 55)/d  d = 2.340

c. Calculate the rate of return for the second period (t = 1 to t = 2).

c. The return is zero. The index remains unchanged because the return for each stock separately
equals zero.

d. Calculate the first-period rates of return on a market-value-weighted index of the three stocks.

d. Total market value at t = 0 is: ($9,000 + $10,000 + $20,000) = $39,000

Total market value at t = 1 is: ($9,500 + $9,000 + $22,000) = $40,500
Rate of return = ($40,500/$39,000) – 1 = 3.85%
3. You are given the following information regarding prices for stocks of the following firms:

Price
Stock Number of shares T T+1
Beximco 1,000,000 60 80
BATBC 10,000,000 20 35
Bank Asia 30,000,000 18 25

a. Construct a price-weighted index for these three stocks, and compute the percentage change in the series for the
period from T to T + 1. Assume a starting index value of 10,000 points.

a) 42.85%

b. Construct a value-weighted index for these three stocks, and compute the percentage change in the series for the
period from T to T + 1. Assume a starting index value of 10,000 points.

b) 47.50%

c. Briefly discuss the difference in the results for the two stock indexes.

c) The percentage change for the price-weighted series is a simple average of the
differences in price from one period to the next. Equal weights are applied to each
price change.

The percentage change for the value-weighted series is a weighted average of the
differences in price from one period t to t+1. These weights are the relative market
values for each stock. Thus, Bank Asia’s stock carries the greatest weight followed
by BATBC and then Beximco. Because Bank Asia had the greatest percentage
increase and the largest weight, it is easy to see that the percentage change would
be larger for this series than the price-weighted series.
4. Based on the following stock price and shares outstanding information, compute the beginning and ending values
for a price-weighted index and a market-value-weighted index. Assume that the value-weighted index had a base
value of 100 points.

December 31, 2016 December 31, 2017

Stock Price Shares outstanding Price Shares outstanding
Beximco 20 100,000,000 32 100,000,000
BATBC 80 2,000,000 45 4,000,000
Bank Asia 40 25,000,000 42 25,000,000

a. Compute the percentage change in the value of each index.

1. a) percentage change in price-weighted index = 18.99%

percentage change in value-weighted index = 40.19%

b. Explain the difference in results between the two indexes.

b) The percentage change in the value-weighted index was much greater than the change in the price-weighted index
because the stock with the largest market value had the greater percentage gain in price (60% increase).
Use the following table for questions 5 to 14.

Stock Price # Shares

X Y Z X Y Z
Jan. 13, 2017 20 40 30 1000 2000 1000*
Jan. 14, 2017 25 42 18 1000 2000 2000
Jan. 15, 2017 27 45 8 1000** 2000 2000
Jan. 16, 2017 20 40 10 3000 2000 2000

*2:1 Split on Stock Z after Close on Jan. 13, 2017

**3:1 Split on Stock X after Close on Jan. 15, 2017
The base date for index calculations is January 13, 2017

5. Calculate a price weighted average for January 13th.

A. 32 B. 30
C. 36.13 D. 34
Answer: B
6. What is the divisor at the beginning of January 14th?
A. 3.0 B. 2.5
C. 2.2734 D. 1.9375
Answer: B
7. Calculate a price weighted average for January 14th.
A. 32 B. 30
C. 36.13 D. 34
Answer: D
8. Calculate a price weighed average for January 15th.
A. 30 B. 36.13
C. 32 D. 34
Answer: C
9. What is the divisor at the beginning of January 16th?
A. 1.9375 B. 3.0
C. 2.5 D. 2.2734
Answer: A
10. Calculate a price weighted average for January 16th.
A. 30 B. 32
C. 34 D. 36.13
Answer: D
11. Calculate a value weighted index for Jan. 13th if the initial index value is 100.
A. 111.54 B. 100
C. 102.31 D. 123.07
Answer: B
12. Calculate a value weighted index for Jan. 14th if the initial index value is 100.
A. 100 B. 102.31
C. 123.07 D. 111.54
Answer: D
13. Calculate a value weighted index for January 15th if the initial index value is 100.
A. 102.31 B. 100
C. 123.07 D. 111.54
Answer: A
14. Calculate a value weighted index for January 16th if the initial index value is 100.
A. 123.07 B. 100.00
C. 102.31 D. 111.54
Answer: A

5. B 6. B 7. D 8. C 9. A 10. D 11. B 12. D 13. A 14 . A