1. A mutual fund owns 500 shares of X currently trading at $ 12, and 300 shares
ID: 2698591 • Letter: 1
Question
1. A mutual fund owns 500 shares of X currently trading at $ 12, and 300 shares of Y, currently trading at $ 24. The fund has 900 shares outstanding.
a. What is the Net Asset Value of the fund ?
b. If investors expect the price of X shares to increase to $ 14, and Y shares to decrease to $ 23, at the end of the year, what is the new NAV ?
c. Assume that the expected price of X shares is realized at $ 14. What is the maximum price decrease that can occur if Y realize an end of year NAV equal to the NAV estimated in (a) ?
2. An investment bank pays $ 20.50 per share for 3 million shares of X. It then sells these shares to the public for $ 22.50 per share. How much money does X receive ? What is the profit to the investment bank ? What is the stock price of X ?
3. An investment bank agrees to underwrite a $ 100,000,000, 8-year 7% semiannual bond issue for X Corporation. If interest rates rise 0.03%, or 3 basis points overnight, what will be the impact on the profits of the investment bank ?
Explanation / Answer
a) net assest value = (500 * 12 + 300 *24)/900 = 14.67
b)expected NAV = (500 * 14 + 300 * 23)/900 = 15.44
c) 500 * 14/900 + 300 * P/900 = 14.67
P=20.68....maximumprice
2)x recieves = 20.5 * 3000000 =61500000
profit = (22.5-20.5) * 3000000 = 6000000
the profit represents the commission it must pay to issueof stock
3)The investment banker will absorb the decrease in market value, since the issuing firm already has received its payment for the bonds
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