Question

WBA stock price is $114 and DOW stock price is $50.00. The Dow Jones divisor is 0.147. How would the divisor change value if AMZN ($3200.00/Share) were to replace DOW and GOOG ($114.00/Share) was to replace WBA?

Answer 1

Dow Jones index value = Sum of share prices of constituents / Divisor value

AMZN replacing DOW, will increase numerator of the above equation by 3150 (+3200 - 50)

GOOG replacing WBA will have no impact as they have the same share price

Hence, in order for the index value to remain constant, the divisor value will increase as shown below

Assume Dow Jones = 28,000. If divisor = 0.147, sum of share prices = 28000 x 0.147 = 4,116

Impact of stock changes = 4116 + 3200 - 50 +114 - 114 = 7266

Hence, new divisor = 7266 / 28000 = 0.260