Consider a mutual fund with $200 million in assets at the start of the year and

Question

Consider a mutual fund with $200 million in assets at the start of the year and with 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $2 million. The stocks included in the fund's portfolio increase in price by 8%, but no securities are sold, and there are no capital gains distributions. The fund charges 12b-1 fees of 1%, which are deducted from portfolio assets at year -end What is net asset value at the start and end of the year? What is the rate of return for an investor in the fund?(L0 4-3)

Explanation / Answer

Net Asset Value at start = $200,000,000/10,000,000 = $20

Dividends per share = $2,000,000/10,000,000 = $0.20

Net Asset Value at end of the year is based on the 8% price gain, less the 1% 12b-1 fee:

Net Asset Value at end = $20 ´ 1.08 (1 – 0.01) = $21.384

Rate of return = 21.384-20+0.20 / 20 = 0.0792 = 7.92%

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