Chapter 18 - Mutual Funds
SOLUTIONS MANUAL
CHAPTER 18
MUTUAL FUNDS
PROBLEMS
Net asset value
1. The Twenty-First Century closed-end fund has $350 million in securities, $8 million in
liabilities, and 20 million shares outstanding. It trades at a 10 percent discount from net asset
value (NAV).
a. What is the net asset value of the fund?
b. What is the current price of the fund?
c. Suggest two reasons why the fund may be trading at a discount from net asset value.
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Chapter 18 - Mutual Funds
18-1. a) NAV 

Total market value of securities  Liabilities
Shares outstanding
$350 million  $8 million $342 million

 $17.10
20 million shares
20 million
b) NAV
10% Discount
Current price
$17.10
1.71
$15.39
c) A fund may trade at a discount because of a poor record of prior performance or
because of heavy investments in an unpopular industry.
Net asset value
2. The New Pioneer closed-end fund has $520 million in securities, $5 million in liabilities,
and 10 million shares outstanding. It trades at a 5 percent premium above its net asset value
(NAV).
a. What is the net asset value of the fund?
b. What is the current price of the fund?
c. Why might a fund trade at a premium above its net asset value?
18-2. a) NAV 

Total market value of securities  Liabilities
Shares outstanding
$520 million  $5 million $515 million

 $51.50
10 million shares
10 million
b) NAV
5% Premium
Current price
$51.50
2.58
$54.08
c) A fund may trade at a premium because of the quality of management, the nature of
its investments, or the fact that it has holdings in unlisted securities or securities of
private companies that are believed to be undervalued on its books.
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Chapter 18 - Mutual Funds
Load funds
3. In problem 2, if New Pioneer converted to an open-end fund trading at its net asset value
with a 6 percent load (commission), what would its purchase price be?
18-3.
NAV
Load 6%  $51.50
Purchase price
$51.50
3.09
$54.59
Load vs. no-load
4. In problem 2, if New Pioneer converted to an open-end fund and traded at $51.50, would it
be a load or no-load fund?
18-4.
Since the fund is trading at its net asset value of $51.50 (as computed in Problem 2),
it is a no-load fund.
Load funds
5. An open-end fund is set up to charge a load. Its net asset value is $8.72, and its offer price
is $9.25.
a. What is the dollar value of the load (commission)?
b. What percentage of the offer price does the load represent?
c. What percentage of the net asset value does the load represent?
d. Do load funds necessarily outperform no-load funds?
e. How do no-load funds earn a return if they do not charge a commission?
18-5. a) Offer price
NAV
Commission (Load)
b)
Load
$.53

 5.73%
Offer price $9.25
c)
Load $.53

 6.08%
NAV $8.72
$9.25
8.72
$.53
d) There is no evidence of superior performance
e) Through a management fee (plus expenses) that normally equals about .75 to 1.25
percent of the assets managed. Load funds have similar fee structures.
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Chapter 18 - Mutual Funds
Load funds
6. In problem 5, assume the fund increased in value by $0.30 the first month after you
purchased 300 shares.
a. What is your total dollar gain or loss? (Compare the total current value with the total
purchase amount.)
b. By what percentage would the net asset value of the shares have to increase for you to
break even?
18-6. a)
New NAV
$8.72
Number of shares
Current value
Offer price
Number of shares
Purchase amount
Loss
 $.30 
$9.02
 300
$2, 706
$9.25
 300
$2, 775
($69)
b) You must earn the load of $.53 on the net asset value of $8.72. The answer is 6.08
percent. This is the same as the answer to 18-5 (c).
Load
$.53

 6.08%
NAV
8.72
Comparative fund performance and loads
7. a. If you purchased a low-load fund at $10.30 and it had a net asset value of $10.00, what
is the percent load?
b. If the fund’s net asset value went up by 33.72 percent, what would its new net asset value
be?
c. What is your dollar profit or loss per share based on your purchase price?
d. What is your percentage return on your purchase price?
18-7. a)
Load
Offer Price

$.30
 2.91%
$10.30
b) Old net asset value
Gain (1+.3372)
New net asset value
$10.00
1.337
$13.37
c) New net asset value
Purchase price
Profit
$13.37
–10.30
$ 3.07
d)
Profit
$3.07

 29.81%
Pruchase Price $10.30
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Chapter 18 - Mutual Funds
Total returns on a fund
8. An investor buys Go-Go Mutual Fund on January 1 at a net asset value of $21.20. At the
end of the year, the price is $25.40. Also, the investor receives $0.50 in dividends and $0.35
in capital gains distributions. What is the total percent return on the beginning net asset value?
(Round to two places to the right of the decimal point.)
18-8. Beginning NAV
Ending NAV
Change in NAV (+)
Dividends distributed
Capital gains distributed
Total return
Total return
Beginning NAV

$21.20
25.40
$ 4.20
.50
.35
$5.05
$5.05
 23.82%
$21.20
Total returns on a fund
9. Dan Herman purchases the Ivy Tower New Horizon Fund at a net asset value of $11.25.
During the year, he receives $0.50 in dividends and $0.14 in capital gains distributions. At the
end of the year, the fund’s price is $10.90. What is the total percentage return or loss on the
beginning net asset value? (Round to two places to the right of the decimal point.)
18-9. Beginning NAV
Ending NAV
Change in NAV (–)
Dividends distributed
Capital gains distributed
Total Return
Total return
Beginning NAV

$11.25
10.90
– .35
.50
.14
.29
$.29
 2.58%
$11.25
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Chapter 18 - Mutual Funds
Total returns with reinvestment
10. Alice Olivia had 200 shares of the Quest Fund on January 1. The shares had a value of
$17.60. During the year she received $90 in dividends and $270 in capital gains distributions.
She used the funds to purchase shares at an average price of $18 per share. By the end of the
year, the shares were up to $18.50. What is her percentage total return? Use Formula 18–2
and round to two places to the right of the decimal point. Recall you first must determine the
number of new shares.
18-10. Step 1
Number of new shares = (Dividends + Capital gains)/Share price
= ($90 + $270)/$18
= $360/$18 = 20 New shares
Step 2
 No.Ending Shares   No.Beginning Shares 



×Ending Price

  ×Beginning Price

Total return =
 No.of Beginning Shares×Beginning Price 
 220×$18.50    200×$17.60 
 200×$17.60 
 $4, 070  $3,520   $550 15.63%

$3,520
 $3,520 

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Chapter 18 - Mutual Funds
Total returns with reinvestment
11. Tom Aaron had 300 shares of the New Decade Fund on January 1. The shares had a value
of $23. During the year he received $150 in dividends and $450 in capital gains distributions.
He used the funds to purchase shares at an average price of $25 per share. By the end of the
year, the shares were all up to $27. What is the percentage of his total return? Use Formula
18–2 and round to two places to the right of the decimal point. Recall that you first must
determine the number of new shares.
18-11. Step 1
Number of new shares =
(Dividends + Capital gains)/Share price
=
($150 + $450)/ $25
=
$600/$25 = 24 new shares
Step 2
 No.Ending Shares  No.Beginning Shares

  

 ×Ending Price
  ×Beginning Price





Total return =
 No.of Beginning Shares×Beginning Price
$324 × $27   300 ×$23
300×$23
$8, 748  $6,900   $1,848  26.78%

$6,900
$6,900

Dollar-cost averaging
12. Under dollar-cost averaging, an investor will purchase $6,000 worth of stock each year
for three years. The stock price is $40 in year 1, $30 in year 2, and $48 in year 3.
a. Compute the average price per share.
b. Compute the average cost per share.
c. Explain why the average cost is less than the average price.
18-12. Year Investment
1
$ 6,000
2
6,000
3
6,000
Totals $18,000
Share Price Share Purchased
$ 40
150
30
200
48
125
$118
475
a) Average price = $118/3 = $39.33
Investment
$18, 000
b) Average Cost =

 $37.89
Sharespurchased
475
c) The average cost is less than the average price because more shares were
purchased at lower costs (based on the fixed dollar investment).
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Chapter 18 - Mutual Funds
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