Question

# 3) A mutual fund has 250 shares of 3M, currently trading at \$160 and 500 shares...

 3) A mutual fund has 250 shares of 3M, currently trading at \$160 and 500 shares of Aflac. currently trading at \$60. The fund has2,500 shares outstanding. (LG 17-5) a. What is the NAV of the fund? b. If investors expect the price of 3M to increas to \$180 and the price of Aflac to decline to \$40 by the end of the year, what is the expected NAV at the end of the year? c. Assume that the price of 3M shares is realized at \$170. What is the maximum price to which Aflac can decline and still maintain the NAV as estimated in (a)? estimated in (a)? NAV = Total market value of assets under management Number of mutual fund shares outstanding a. NAV = ((250 x \$160) + (500 x \$60))/2,500 = b. Expected NAV = ((250 x \$180) + (500 x \$40))/2,500 = an increase of 7.69 percent (28.00 - 26.00)/26.00 = c. (250 x \$170)/2,500 + (500 x PM)/2,500 = \$28.00 (\$42,500/2,500) + (500PM/2,500) = \$28.00 \$17.00 + (500PM/2,500) = \$28.00 500PM/2,500 = \$11 500PM = \$27,500 PM = \$55.00

a) Net Asset Value (NAV) = (Assets – Debts) / (Number of Outstanding units)

Here: Assets = Market value of mutual fund investments + Receivables + Accrued Income

Debts = Liabilities + Expenses (accrued)

The market value of the stocks & debentures is usually the closing price on the stock exchange where these are listed.

(Assuming fund has no debts)

= (250 × \$160)+(500 × \$ 60)/2500

= \$ 28 per share

b) Expected NAV if 3M share price is \$ 180 and Aflac's is \$40

= ( 250 × \$180) + (500 × \$40)/2500

= \$ 26 per share

c) Given NAV = \$ 28

Share price of 3M = \$ 170

Share price of Aflac = X

= (250 × \$170) + ( 500 × X)/2500 = 28

= 500X = (2500×28) - (250 × 170)

= X = 27500/500

= \$ 55 per unit

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