Question

Chapter 13
Financial Planning Exercise 9
Calculating approximate yield on mutual fund

About a year ago, Ramon Navarrete bought some shares in the Saphire Lake Mutual Fund. He bought the fund at $25.80 a share, and it now trades at $26.30. Last year the fund paid dividends of 51 cents a share and had capital gains distributions of $1.03 a share.

1. Using the approximate yield formula, what rate of return did Ramon earn on his investment? Round the answer to two decimal places.
   %
2. Repeat the calculation using a handheld financial calculator. Round the answer to two decimal places.
   %
3. Would he have made a 20% rate of return if the stock had risen to $30 a share?
   -Select-YesNo

Answer 1

The price of the Saphire Lake Mutual Fund a year ago = $25.80

The current price of the Saphire Lake Mutual Fund = $26.30

Dividends received = 51 cents = $0.51

Capital gains distribution = $1.03

Total return received from the investment in a year = $0.51 + $1.03 = $1.54

Option a:

Rate of return from the investment using the yield formula = total return received / current stock price

= $1.54 / $26.30 = 0.058555 = 5.86%

Option b:

Rate of return from the investment using financial calculator = total return received / current stock price

= $1.54 / $26.30 = 0.058555 = 5.86%

Option c:

If the stock price raises to $30 then the rate of return would be

= $1.54 / $30 = 0.051333 = 5.13%

So, the answer is NO. It would not give 20% return.