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Problem 1

Problem 1. $.94. NAV = 1 - load. $11.38. $10.70 = 1-.06. NAV is $10.70 Front-end load is 6% Every dollar paid results in only ____ going toward purchase of shares. Offer price =. 4- 1. Problem 2. $.95. offer price x (1- load). Offer price $12.30 Front-end load is 5%

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Problem 1

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  1. Problem 1 $.94 NAV = 1 - load $11.38 $10.70 = 1-.06 NAV is $10.70 Front-end load is 6% Every dollar paid results in only ____ going toward purchase of shares. Offer price = 4-1

  2. Problem 2 $.95 offer price x (1- load) Offer price $12.30 Front-end load is 5% Every dollar paid results in only ____ going toward purchase of shares. NAV = = $12.30 x 0.95 = $11.69 4-2

  3. Problem 3 Liabilities $30,000 Shares Outstanding 4,000,000 NAV = (Market Value of Assets – Liabilities)  Shares Outstanding A. (200,000)x($35) = $ 7,000,000 B. (300,000)x($40) = $12,000,000 C. (400,000)x($20) = $ 8,000,000 D. (600,000)x($25) = $15,000,000 $42,000,000 $42,000,000 – $30,000 = $10.49 = NAV 4,000,000 4-3

  4. Problem 4 MVA = $42M Market Value Assets = $42,000,000 AHP = 0.5 x 1/Turnover = 0.5 x 1/0.357 = 1.4 yrs Turnover rate = Value of stocks sold and replaced Market Value Assets Value of stocks sold = (600,000x$25)= $15,000,000 or Value of stocks purchased = (200kx$50)+(200kx$25) = $15,000,000 $15,000,000 = 0.357 or 35.7%$42,000,000 Average holding period? 4-4

  5. Problem 5 The empirical research suggests that past performance is not highly predictive of future performance, especially for better performing funds. There may be some tendency for the fund to perform better than average next year, but it is unlikely that the fund will be in the top 10%. Evidence suggests that bad performance is more likely to persist. Probably related to high fund costs or high turnover rates. Excessive costs are detrimental to a fund’s returns. 4-5

  6. Problem 6 ($22,160  $20,833) / $20,833 = 6.37% • As an initial approximation, your return equals the return on the shares minus the total of the expense ratio and purchase costs: • Return  12%  1.2%  4% = 6.8% • But the precise return is less than this because the 4% load is paid up front, not at the end of the year. To purchase the shares, you would have had to invest: • $20,000 / (1  0.04) = $20,833 • The shares net increase in value (12%  1.2%) from $20,000 to: • $20,000  (1.12  0.012) = $22,160 • The rate of return is: 4-6

  7. Problem 7 $940 • Sell after 4 years: Suppose you have $1000 to invest. The initial investment in Class A shares is ____ net of the front-end load. After 4 years, your portfolio will be worth: $940  (1.10)4 = $1,376.25 Class B shares allow you to invest the full $1,000, but your investment performance net of 12b-1 fees will be only 9.5%, and you will pay a 1% back-end load fee if you sell after 4 years. Your redemption value after 4 years will be: $1,000  (1.095)4 x 0.99 = $1,423.28 Class B shares are the better choice if your horizon is 4 years. 4-7

  8. Problem 7 Cont. What is the breakeven time? $940 x (1.10)N = $1,000 x (1.095)N [$1,000 / $940 ] = (1.10)N / (1.095)N 1.06383 = [1.10 / 1.095]N LN 1.06383 = LN [1.10 / 1.095]N LN 1.06383 = 0.061875 = N x 0.004556 N = 13.581 years $3,926.61 N x LN [1.10 / 1.095] $3,901.32 • Sell after 15 years: With a 15-year horizon, the Class A shares will be worth: $940  (1.10)15 = For the Class B shares, there is no back-end load in this case since the horizon is greater than 5 years. Therefore, the value of the Class B shares will be: $1,000  (1.095)15 = At this longer horizon, Class A shares are the better choice. Why? 4-8

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