Question

The price-weighted Dow Jones Industrial Average Index closed at 12,500 today and the divisor was 0.14. One of the 30 constituent stocks had a 5-for-1 stock split right declining from $100 to $20 per share right after the market close (immediately after the index value and divisor above were observed). What would the new divisor have to be to keep the index value unchanged at 12,500?    

Group of answer choices

1) 0.1320

2) 0.1424

3) 0.1416

4) 0.1336

Answer 1

Answer: 4) 0.1336

Calculation:

Value of Price weighted index = Total sum of constituent prices / Divisor

Currently, the Value of Dow Jones = 12500 and Divisor is 0.14

So, Current sum of prices of all 30 constituent is = Value of index * Divisor

= 12500 * 0.14

= 1750.

After Split, One stock's per-unit price will be $20 from $100. Which leads to a decline of $80 per share.

So, the New Sum of the price of 30 constituent will decline by $80.

New sum of prices = $1750 - $80 = $1670.

So, New Divisor = New sum of prices / New Dow Jones value.

= 1670 / 12500

= 0.1336