An Index Is Made Up of Stock A, Stock B

question 50

Multiple Choice

An index is made up of Stock A, Stock B, and Stock C. The prices of the three stocks are $45, $126, and $64. If Stock B undergoes a 3-for-1 stock split, what is the new index divisor?

• A) 1.78932
• B) 1.92766
• C) 1.84312
• D) 1.86644

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Definitions:

Capital Structure

The mix of debt and equity financing a company uses to fund its operations and growth.

M&M Proposition II

Modigliani and Miller's Proposition II states that a company's cost of equity increases as it increases its leverage due to the risk premium on equity.

Debt-Equity Ratio

A financial ratio that measures the relative proportion of shareholders' equity and debt used to finance a company's assets.

Financial Risk

The chance of incurring a loss in capital in an investment or business operation.