Question

Consider a no-load mutual fund with $390 million in assets and 15 million shares at the start of the year and with $440 million in assets and 16 million shares at the end of the year. During the year investors have received income distributions of $4 per share and capital gain distributions of $0.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 2%, what is the rate of return on the fund

Answer 1

20%

Step-by-step explanation:

The computation of rate of return on the fund is shown below:-

Net assets value at the beginning = Total assets ÷ Number of shares

= $390 million ÷ 15 million

= $26 million

Net assets value at the end of the year = (Total assets - Expenses) ÷ Number of shares

= ($440 million - ($440 million × 2%)) ÷ 16 million

= ($440 million - $8.8 million) ÷ 16 million

= $26.95 million

Now,

Rate of return = (Net assets value at the end of the year - Net assets value at the end of the year + Income distribution + Capital gain distribution) ÷ Net assets value at the beginning

= ($26.95 million - $26 million + $4 per share + $0.25 per share) ÷ $26 million

= $5.2 million ÷ $26 million

= 20%