<p>CHAPTER 14 MUTUAL FUNDS, INVESTMENT REAL ESTATE, AND OTHER INVESTMENT ALTERNATIVES SOLUTIONS TO END OF CHAPTER APPLICATION PROBLEMS Page 480 in Textbook</p><p>1. Net Asset Value a. Net asset value = (240 – 10)/15 = $15.33 per share b. The price is $1.67 or 10.9% highet than the closed end fund’s NAV. Investors are willing to pay more than the current market price for the fund. Whether this is a good deal depends on if you expect the price of the fund’s shares to continue to rise in the future. If you think that prices might fall, it would be a good idea to sell and realize the difference.</p><p>2. Net Asset Value a. NAV=(50 – 5)/5 = $9.90 per share. b. The NAV has increased $9.90 - $8.00 = $1.90 per share. The annual change in value was 1.90/8.00 = 23.75%</p><p>3. Expense Ratio The expense ration = 1/40 = 0.025, or 2.5%.</p><p>4. Front-End Load a. Your total investment is 50 x $35 = $1,750. The sales charge is 0.04 x $1,750 = $70. b. $1,750 - $70 = $1,680. This is 1,680/50 = 33.60 per share.</p><p>5. 12b-1 Fees a. Since it’s a no load fund, you won’t pay the fee directly. b. The ½% 12b-1 fee will be taken out of the investment returns for the year on the entire fund, so you will earn ½% less than you would have without the fees. That will result in an indirect cost of $10,000 x 0.005 = $50 for the year. </p><p>6. Back-End Load If you sell in the third year, the back-end load will be 3 percent. The deferred sales charge will therefore be $1,000 x 3% = $30.</p><p>7. Matching Investment Objectives with Funds a. 20-year old saving for down payment: recommend money market fund, since she needs to preserve capital and she has a short time horizon. b. 60-year old retired couple: recommend corporate bond fund for income or a state municipal bond fund that would provide tax-free income. c. 30-year old couple saving for child’s college: recommend equity fund because they need capital appreciation and they have a fairly long time horizon.</p><p>8. One-Year Returns a. Percent return for the year is the increase in NAV plus the dividend yield. </p><p>163 = 12% + (1.50/$50) = 12% + 3% = 15% Your return is lower because you must factor in the 5% front-end load you paid. Your return is therefore only 10% b. If the NAV fell by 15%, the loss would be offset by the 3% dividend yield, so the net for the year would be a loss of 12%. With your front-end load, you would have lost 17%.</p><p>9. Return on Investment a. Two year holding period return = (36+2+2-31)/31 = 9/31 = 29% b. Annual holding period return = (1.29)1/2 -1 = 13.6% </p><p>10. Return on Investment Real Estate a. Return on investment = (190,000 + 12,000 – 180,000)/180,000 = 12.2% b. Annual interest on the loan = 6% x 90,000 = $5,400 Return on investment = (190,000 +12,000 – 5,400 – 180,000)/90,000 = 18.4% c. You would have to pay a real estate commission and closing costs. This will reduce the net selling price and decrease the return on investment.</p><p>11. Return on Collectible Investment Annual return = (2,500/1,000)1/10 – 1 = 9.6% per year.</p><p>164</p>
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