Question

23-4

An investment fund has the following assets in its portfolio: $43 million in fixed-income securities and $43 million in stocks at current market values. In the event of a liquidity crisis, it can sell its assets at a 93 percent discount if they are disposed of in four days. It will receive 95 percent if disposed of in six days. Two shareholders, A and B, own 7 percent and 9 percent of equity (shares), respectively.

a.

Market uncertainty has caused shareholders to sell their shares back to the investment fund. What will the two shareholders receive if the investment fund must sell all its assets in four days? In six days? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g., 32.16))

	A	B
Four days	$  million	$  million
Six days	$  million	$  million

Answer 1

Stock value at current market price = $43 million

Stock value realised if sold within 4 days = 43 x 93%

= $39.99 millions

Shareholder A has 7% equity

Hence, A will get = 39.99 x 7%

= $2.80 millions

Shareholder B has 9% equity

Hence, B will get = 39.99 x 9%

= $3.60 millions

Stock value at current market price = $43 million

Stock value realised if sold within 6 days = 43 x 95%

= $40.85 millions

Shareholder A has 7% equity

Hence, A will get = 40.85 x 7%

= $2.86 millions

Shareholder B has 9% equity

Hence, B will get = 40.85 x 9%

= $3.68 millions

	A	B
Four days	$2.80 millions	$3.60 millions
Six days	$2.86 millions	$3.68 millions

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubts. Thanks