Question

A mutual fund has 600 shares of General Electric, currently trading at $13, and 600 shares of Microsoft, Inc., currently trading at $29. The fund has 1,500 shares outstanding. a. What is the NAV of the fund? (Round your answer to 2 decimal places. (e.g., 32.16)) b. If investors expect the price of General Electric to increase to $20 and the price of Microsoft to decline to $14 by the end of the year, what is the expected NAV at the end of the year? (Round your answer to 2 decimal places. (e.g., 32.16)) c. Assume that the price of General Electric shares is realized at $20. What is the maximum price to which Microsoft can decline and still maintain the NAV as estimated in (a)? (Do not round intermediate calculations. Enter your answer to the nearest whole number.

Answer 1

(a)-The NAV of the fund

The NAV of the fund = [(600 x $13) + (600 x $29)] / 1,500 Shares

= [$7,800 + $17,400] / 1,500 Shares

= $25,200 / 1,500 Shares

= $16.80

(a)-The expected NAV at the end of the year

The expected NAV = [(600 x $20) + (600 x $14)] / 1,500 Shares

= [$12,000 + $8,400] / 1,500 Shares

= $20,400 / 1,500 Shares

= $13.60

(c)-The maximum price to which Microsoft can decline and still maintain the NAV

$16.80 = [(600 x $20) + (600 x P)] / 1,500 Shares

$16.80 = [$12,000 + (600 x P)] / 1,500 Shares

$16.80 x 1,500 = [$12,000 + (600 x P)]

$25,200 = [$12,000 + (600 x P)]

$25,200 - $12,000 = 600 x P

$13,200 = 600 x P

P = $13,200 / 600

P = $22

The maximum price will be $22