Question

An investment fund has the following assets in its portfolio: $42 million in fixed-income securities and $42 million in stocks at current market values. In the event of a liquidity crisis, it can sell its assets at a 91 percent discount if they are disposed of in three days. It will receive 93 percent if disposed of in five days. Two shareholders, A and B, own 6 percent and 8 percent of equity (shares), respectively.

a. Market uncertainty has caused shareholders to sell their shares back to the investment fund. What will the two shareholders receive if the investment fund must sell all its assets in three days? In five days? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g., 32.16))
  

Answer 1

Value of fixed-income securities if sold in two days

= $42m x 0.91 = $38.22m

Valueof stocks if sold in two days

=$42m x 0.91 = $38.22m

Total = $76.44

Shareholder A will receive $76.44m x 0.06 = $4.59m down from the current value . Shareholder B will receive $76.44m x 0.08 = $6.115m down from the current value .

Value of fixed income securities if sold in two days

= $42m x 0.93 = $39.06

Value Of stocks if sold in two days

=$42m x0.93 = $39.06

Total = $78.12

Shareholder A will receive $78.12m x 0.06 = $4.69m down from the current value . Shareholder B will receive

$78.12m x 0.08 = $6.25m down from the current value