Question

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

Answer 1

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