Question

Consider a mutual fund with $600 million in assets at the start of the year and 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $2.7 million. The stocks included in the fund's portfolio increase in price by 9%, but no securities are sold and there are no capital gains distributions. The fund charges 12b-1 fees of 1.00%, which are deducted from portfolio assets at year-end.

a. What is the fund's net asset value at the start and end of the year? (Round "End of the year" to 3 decimal places.)

	Net Asset Value
Start of the year
End of the year

b. What is the rate of return for an investor in the fund? (Round your intermediate calculations to 3 decimal places and final answer to 2 decimal places.)

Rate of return =

Answer 1

a) Net asset value (NAV) at the start of the year = Mutual fund asset at the start of the year/Number of shares outstanding

= $ 600 million/10 million = $60

Mutual fund asset at the end of the year = Fund's portfolio value at the beginning + fund appreciation + dividend received - fund mangement fees (assumed 1% on Mutual fund asset at the start of the year)

= $600million + $600 Million * 9% + $2.7 million - 1% * $600 million

= $600 million + $54 million + $2.7 million - $6 million

= $650.7 million

NAV at the end of the year = Mutual fund asset at the end of the year/Number of shares outstanding

= $650.7 million/10 milllion = $65.07

b) Rate of return = (NAV at the end of the year - NAV at the start of the year)/NAV at the start of the year

= ($65.07 - $60)/$60

= $5.07/$60

= 0.0845 or 8.45%