If the Dow Johns industrial average stock splits 3 for 1 then what impact will this have on the index divisor?
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A. B. C. D.C
The Dow Jones Industrial Average (DJIA) is a stock market index that measures the performance of 30 large publicly-traded companies in the United States. The DJIA is calculated using a formula that involves dividing the sum of the stock prices of the 30 companies by a number called the "index divisor."
If one of the stocks in the DJIA splits, it can affect the calculation of the index divisor. A stock split is when a company increases the number of its outstanding shares by issuing new shares to its current shareholders. In a 3-for-1 stock split, for example, each shareholder would receive three new shares for every one share they currently own, effectively tripling the number of outstanding shares.
If a stock in the DJIA undergoes a 3-for-1 split, the price of that stock will decrease by a factor of three, because there are now three times as many shares outstanding. However, the sum of the stock prices of the 30 companies in the index will remain the same, because the price decrease of the stock that split will be offset by an increase in the number of shares outstanding.
Because the sum of the stock prices in the DJIA remains the same after a stock split, but the number of shares outstanding has increased, the index divisor must be adjusted in order to keep the value of the index consistent. In the case of a 3-for-1 split, the index divisor would be divided by three, because there are now three times as many shares outstanding for the stock that split.
Therefore, the correct answer to this question is C. Index divisor will decline.