Question

Consider a mutual fund with $340 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 $2.4 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.)

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 and end of the year

• Net asset value at the start of the year (NAV₀) = $34,00,00,000 / 1,00,00,000 Shares

= $34 per share

• Dividend per share = $0.24 per share [$24,00,000 / 1,00,00,000 Shares]

• Net asset value at the end of the year (NAV₁) = $34 x 1.09 x (1 – 0.01)

= $36.689 per share

(b). Rate of return for an investor in the fund

Rate of return for an investor in the fund = [(NAV₁ + D – NAV₀) / NAV₀] x 100

= [($36.689 + $0.24 - $34) / $34] x 100

= [$2.929 / $34] x 100

= 8.61%