Question

Consider a mutual fund with $480 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 $2.5 million. The stocks included in the fund's portfolio increase in price by 6%, 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

Net Asset Value at start of the Year = Initial Assets / Nos of Shares

=  $480 million / 10 million = 48.000

Net Asset Value at end of the Year = Ending Assets ( 1 - fees) /  Nos of Shares

Ending Assets =  Initial Assets* ( 1 + 6% ) = 480 million * ( 1 + 6%) = 508.8 million

Net Asset Value at end of the Year =   508.8 *( 1 - 1%) /  10 = 50.371

Ans A : fund's net asset value at the start the year = 48.000

fund's net asset value at the end of the year = 50.371

Dividend Income Earned per share = Dividend / Nos of Shares = 2.5 million / 10 million = 0.25

rate of return for an investor in the fund =

= (NAV1 - NAV0 + Dividend Income Earned per share) / NAV0

= ( 50.371 - 48.000 + 0.25) / 48.000

= 2.6212 / 48

= 5.46%

Ans B :rate of return for an investor in the fund = 5.46%