MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES = chapter Price NAV _ Rs 36- Rs 3940 x . b. Premium (or discount) =""“Nay, ~—-RS3940 50,086 = 8.6% si “Te fund sells at an 8.6% discount from NAV. per share: 7,000 Rs.150 : 2,000. Rs.140 Total Assets We have, rotal Assets Liabilities _4,30,000=0 43 per share Nveroaiaconudng = 70000, 0° (b) Expected NAV =? When, =Rs 10 Price per share of ABC Co. Price per share of XYZ Co. = Rs.180 Calculation of Total Market value os = imine we wien. Rs.4,00,000 Total Assets Now, we have Total Assets Liabilities _ 4,00,0000= 0. No. of share outstanding 00 (2) Let, Rs.x be the expected price of ABC Co. NAV as estimated in (a), then According to given information, T Expected NAV = Rs. 40 per share of stock — Liabilities NAY (as in part 2) 1.000 » 180 + 2,000 x x=0 10,000 for, 1,000 « 180 +2,000 = x= 4,30,000 or, 2,000x = 4,30,000 ~ 1,80,000 250,000 or, x=" 7.000 x= Rs 125 Therefore, the price of ABC Co. should-be declined to Rs125 to maintain NAV as estimated in (a) (NAV,= NAVi1) # CCy + Div _ 300 = 200.4 5040 HPR= ce a = 0.75.00 75% (NAY, = NAV) + CC + Div. HPR ca (150 ~ 100) + 30-+7.55 For 2014, HPRavia 100 og, (120150) + 10+ 6 For 2015, HPRo a) =~ 0.0933 or -9.33% (a) Calculation of HPR co} Weave, HPR, (Selling rice net of bokeraye com Purse peg mission Purchase pre ching bkeraue commission) + Dinden eee eee a7 cring brokerage Commission,oN MANUAL TO INVESTMENT ANALYSIS ‘Ending Beginning price + D, + CG, return (HPR)_ = Beginning price 11.22-— 12.27 + 0.40 40.95 a 30 souT! Holding perio# 10245 = 2.45% oes sae? NAV) =NAVe+ Dit CG, a NAV-based PR = NAVo 92512505120 0050 = 0.5133 or 51.33% b. Beginning of the year Market price - NAV. _ 7,757.50 =33 Premium (discount) = NAV =50 3% Premium = 3.33% nding of the year 9.0-9.25 _ Market price = NAV. Premium (iscount) = MERSLPHEE BAY 25557 0.027 or-2.7%4 Discount =-2.7% Ending price ~ Beginnin; cMarket based HPR Teneo 9-775 41.2409 = e105) : Premium / discount hurt the HPR. Investor purchased the shares at premium and s discount as a result HPR decreased. G NAVo=Rs. 20 : NAVs = Rs. 22.91 Beginning Numer of shares = 1600 Ending number of shares = 1100. ‘Compounded rate of return : Beginning value = 20 = 1000= Rs, 20,000 Fnding value= 22.91 1100 =Rs. 25,201 Now, = 0.4323:0r 43.23% 25201 ; 2.000 - 2520 2520) (+0)'=39 000 1+r= (1.2601)! += 01680 or 896 \ [there were a 3% load fee offer price atthe beginning = ee investment = 20.62 « 100 = 20,620 25201, ay 25201 10620 of 1 (1.222999 ¥- 0.0699 or 6.92% SIE & Stock 20620 =. or, (+H) Value held by fund Rs 7,000,000 12,000,000‘Rs 42,000,000 = Rs 30,000 Net asset value= One bb Value of stocks sold and replaced: sree ae SMO gas7a35 Future value = Present value (1 + i” FV=Rs 10,000 (1 +0.12-0.01 yi = Rs 13,676.31 For fund ¥ EV = Rs 10,000 (1 + 0.12)! (10108) =Rs 1348731 be Caleulation future value after 6 years For fund X EV = Rs 10,000( 1+ 0.1DS= Rs 18,704.18 For fund Y FV = Rs 10,000 (1 + 0.1238 x (10.04) = Rs 18,948 098 Tobe indifferent future value of the funds should be equal: 1) of tind X= FV of find ¥ fey Lua (1+ Lyte 10.000 UFO I27 L008) Lu" _ 9,600 (ey 10,000 Taking log on both sides Log 0.99107 = Log 0.96 n= 456 years 4d Pront-end fad fees are paid only athe begining of ineimen annual 12b — 1 charge recs every year Ifthe holding period # more tas 450 J ‘he initial Toad fee with 2 Pa ee pencil ere § i baling pei is Tess than 459 YA, it will be beneficial to invest in Fund Y Given, Total investment amount = Rs 1,000 Loud fee 85% Time period = 5 years Returw an investment = $14 Management and ather fee = 1.10% per annum Now, ‘rst of ealeulating intial amount thal would faye carne! in Sawn account paying 5% imterest i 000 (1 +lerest me) 10001 +008) ~Rs 12762818 Then, Calculating nel amount = Rs 1,000 (1 = Load fee) = Rs 1,000 (1 = 0.085) = Rs 915 cu. Pature value of net ammount onsidefing management and athet FSS Fare value = Net amount (1+ Net annual return)” Ry 915 [1+ (JIPR ~ Management wid other fee) = Rs 915 [1 + GIPR~ 0.0LN)P= Rs 918 (0.989 * HPR)* Then, Future value ofthe fund = Future value of an init or 5915 (0.989 + HPR)*= Rs 1276.2816 amount that eames S percent interestsou ; UTION MANUAL TO INVESTMENT ANALYSig © 0.99 HR) -BELBME2EG or (0.989 x is HPR | eR) = (1:3948)""= | 0688 or 06880989 = 9 y = 0.07 Ww behee 0798 Therefore, the requir * required annual rate of retum is 7.98 percent We have, : : : Fund Investinent amount : ai NAV. we n0e , | Rsi,000 Rs 1,000 Market price R10 ae ni Brokerage fee 4 es bells é Load fund : iy a a No.ofshares a : ag We have, 7 - Number of shates «Total investable fund ‘Cost per share _ For closed end fund E, For closed end fund D Numberofshinee 221000 Rs 1,000 er of shares = RS TOMS Number of shares = RETTD = 122.55 shares 98.04 shares Cost per share = Rs 8+2 percent of Rs & Cost per share 8 10+ 2 percent of Rs 10 =Rs 816 Rs 10.2 For closed end fund N For closed end fund 1. umber atures 85:00 w ooscy | Nnke faese AOE age (a) Net Asset values, (NAV) per share Total net asset value NAV, per share => oF shares = 85.10,00,000 _ 2 1g 1,00,000 NAV per share at the beginning of yea ‘ Rs.11,00,000 _ NAV per share at the end of year=" 79 999 RS.10 Rs.10,00,000 _ NAV per share atthe beginning of the year = —99,q99_~ R10 Rs 1,200,000 y =RsI2 NAV per share at the end of year=Rs~199.q90 RI ‘Operating expenses (excluding brokeraze cost NAV 10,000 Fund A Expense ratio © 7p. 99,000 12,000_ + a Expense raiio =p, 99,0q0 0012 12 ‘Miuimum of sale of purchase + (@) Portfolio turnover ratio=" Average net aset value Fund-A Fund-B (b) Expense ratio Expense ratio = 0,01 or 1% Fund-BuTUAL FUNDS AND OTHER INVESTMENT COMPANIES «Chapter 33 Fe Portfolio turnover rat no 800.000, For fund-A — Portfoti et ratio= 77p-90,000 + 11,00,000)2~ 9476 , 8,00,000 For fund —B Portfolio turnover ratio= [75-55 900 + 12,00,000)2~” mn EEE iment inthe Claks A shares afer the 4% Gommission is RS 9,600 he fund cams rare yn the investnent will g70W after n years LO Rs 9,600 » (1.10), The Class shares 2 vernicend toad, However, the net return to the investor after 12b-1 fees will be only an egditon, there isa back-end load that reduces the sales proceeds by a percentage cual 2. Ce years unt sale) until the fifth year, when the back-end loud expires Class A Shares ‘Class B shares Rs 9,600 * (1.10)" Rs 10,000 * (1.095) Rs 10,560.00 Bs 10,000 = (1.095) « 1 — 0.08) =Rs 10,512.00 Rs 14,055.36 Rs 10,000 » (1.095)! (1 ~0.01) = Rs 14,232.89 Rs 24,899.93 Rs 10,000 x (1,095)!= Rs 10,512.00 _” Fora very short horizon such as one year, the Clas A shares are the better choles The front-end rota Nelond Toads are equal, but the Class A shares don’t have to pay the 12) fees. For a oan vovizans such as four years, the Class B shares dominate because the fronvene Toad of rmodeate ores is more costly, than the 12b-1 fes,and the now-smaller exit fee fO4 long vizans of 10 years or more, Class A again dominates; In this eas, the one-time front-end toad is less expensive than the continuing 12b-I fees a Turnover = Rs 165,000 in trades per Rs 1 milion of portfolio value= 16.5% ; 2 active capital gains are Rs 10 ~ 1,000 & Rs 10,000 on FedEx and Rs 250 8 000 = Rs 1200 on Cisco. The tax owed on the capital gains s therefore 0.15 x RS 22,500 Rs3,375 iSolution 4.25] Rs 200,000,000 NAVo=""¥9,000,000 8520 Rs 2,000,000 vi er share = 15 690,0007 = 8S Dividends per share =“T9 999,000, ~ °° 920 Horizon NAVs is based on the 8% price gain, less the 1% 12b-I fees, NAV, =Rs 20x 1.08 x (10.01) = Rs 21.384 Rs 21.384 Rs 20+ RS 0.20 Rate of rent = a The excess of purchases over sales must be due (bnew inflows ino the find Therefore, Rs 4100 clon of stock previously held by the fund was replaced by new holdings, So, annenss jg B84000m Rs 2,200. Fees paid to investment managers were: 0,007 x Rs 22 billion = Rs IS. 4anition Since the total expense ratio was 1.1% and the management fee was 0726 8 ‘conclude that ac crest be forather expenses. Therefore, other administrative expenses were: 1.004 * Rs 22 billion = Rs 8 8 million ‘AS an initial approximation, your return equals the return on the shares minus the total of the expense ratio and purchase costs: 12% ~ 1.2% ~ 4¥%= 6.8% Bin he peste earns Tess than this because the 4% foad is paid up fron, not at the end oF the year = 0,182 = 18.2% Rs 20,000 3. To purchoe te sbieplyou woud tase inte a oe “The shares imerease in value from Rs 20,000 to: Rs 20,000 x (1.120.012) “Rs 22,160 Rs 22,160 ~ Rs 20.833 Rs 20,833 The rate of return is = 639%34 SOLUTION MANUAL To INVESTMENT ANALYSIS After two, ‘years, each dollar invested ina fund with a 4% load and a T will grow to: Rs 0.96 x (1 + 40,008)? 7 Each dollar invested in the ‘bank CD will grow to: Rs 1 x 1.06 If the mutual fund is to be the beiler investment, then the portiolio return (¢) 0.96 x (1 +r—0.005)'> 1.067. > 0.96 x (1 + 10.005)? > 1.1236 : (1 +1=0.005)'> 1.1704 1 +5 0.005 > 1.0819 1+r> 1.0869 Therefore: r > 0.086 69% Ifyou invest for six years, then the portfolio return must satisfy: 0.96 x (I +1 ~0.005)*> 1.06°= 1.4185 (1 +r 0.005)" > 1.4776 1 +1~ 0.005 > 1.0672 T+r>1.0722 1> 7.22% ‘The cutoff rate of retum is lower for the six-year investment because the “fixed: the one-time front-end load) is spread out ovgra greater number of yeas. With a 12b-I fee instead of a front-end load, the portfolio must eam a rate of retum (1) satisfies: ae 10,005 0.0075 > : q hits oe + must exceed 7.25% regardless of the investment horizon +