Question

Consider a mutual fund with $680 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 $3.5 million. The stocks included in the fund's portfolio increase in price by 7%, but no securities are sold and there are no capital gains distributions. The fund charges 12b-1 fees of .75%, 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?

b. What is the rate of return for an investor in the fund?

Answer 1

Answer : (a.) Calculation of Funds Net Asset Value at the start of year :

Net Asset Value at start of Year = Asset Value at start of year / Number of shares outstanding

= 680 million / 10 million

= $68

Net Asset Value at end of Year = Net Asset Value at start of Year * (1 + growth) * (1 - fund Charges)

= 68 * 1.07 * (1 - 0.0075)

= 72.2143 or $72.21

(b.) Rate of Return = (Net Asset Value at end of Year - Net Asset Value at start of Year + Dividend per share) / Net Asset Value at start of Year

Dividend per share = Total Dividend / Number of shares outstanding

= 3.5 million / 10 million

= 0.35

Rate of Return = (72.2143 - 68 + 0.35) / 68

= 6.71%