Question

Consider a mutual fund with $620 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 8%, 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.)

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.)

Answer 1

a)
Net asset value at the start of the year = Beginning assets / number of shares outstanding
= $620 million / 10 million
= $62

Net asset value at the end of the year = ((Assets in the beginning * (1 + growth rate)) * (1 - 12b-1 charges)) / Number of shares outstanding
= (($620 * (1 + 8%)) * (1 - 1%)) / 10
= $662.904 / 10
= $66.290

b)
Dividend per share = $3.5 / 10 = $0.35

Rate of return = (Net asset value at the end of the year + Dividend per share - Net asset value at the start of the year) / Net asset value at the start of the year
= ($66.290 + $0.35 - $62) / $62
= 7.48%

Rate of return = 7.48%