The Equity Fund sells Class A shares with a front-end load of 4% and Class B sha

Question

The Equity Fund sells Class A shares with a front-end load of 4% and Class B shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth year). Assume the rate of return on the fund portfolio net of operating expenses is 10% annually. What will be the value of a $10,000 investment in Class A and Class B shares if the shares are sold after (a) 1 year, (b) 4 years, (c) 10 years? Which fee structure provides higher net proceeds at the end of each investment horizon?

Explanation / Answer

The net investments in the Class A shares after the 4% commission is $9,600. If the fund earns a 10% return, the investment will grow after n years to $9,500 X (1.10)n up. The Class B shares have no front-end load. However, the net return to the investor after 12b-1 fees will be only 9.5%.

In addition, there is a back-end load that reduces the sales proceeds by a percentage equal to (5 - years until sale) until the fifth year, when the back-end load expires.

1 year:

Class A Shares=$10,560.00, Class B Shares=$10,000X(1.095)X(1-.04)=$10,512.00

4 years:

Class A=$14,055.36, Class B=$10,000X(1.095)4upX(1-.01)=$14,232.89

10years:

Class A=$24,899.93, Class B=$10,000X(1.095)10up=$24,782.28

For a very short horizon such as one year, the Class A shares are the better choice. The front-end and back-end loads are equal, but the Class A shares don't have to pay the 12b-1 fees. For moderate shares is more costly than the 12b-1 fees and the now smaller exit fee. For long horizons of 10 years or more, Class A again dominates. In this case, the one-time front-end load is less expensive than the continuing 12b-1 fees.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.