Question

City Street Fund has a portfolio of $415 million and liabilities of $15 million.

a. If there are 80 million shares outstanding, what is net asset value?

Net asset value            $

b-1. If a large investor redeems 3 million shares, what happens to the portfolio value? (Enter your answer in millions.)

Portfolio value (Click to select)increasesdecreases to $  million.

b-2. If a large investor redeems 3 million shares, what happens to shares outstanding? (Enter your answer in millions.)

Shares outstanding (Click to select)increasesdecreases to  million.

b-3. If a large investor redeems 3 million shares, what is net asset value?

Net asset value            $

Answer 1

Solution:
a.	Net Asset value = $5
Working Notes:
	Net Asset value = (Portfolio value - Liabilities )/No of shares outstanding
	Net Asset value = ($415 million -$15 million )/ 80 million
	Net Asset value = $400 million / 80 million
	Net Asset value = $5
b-1.	Portfolio value decreases to $ 400 million
Working Notes:
	Change in portfolio value = Net assets value x No of shares redeems
	Change in portfolio value = $5 x 3 million
	Change in portfolio value = $15 million
	So , portfolio value will decreases by redeem value = Old portfolio value - Change in portfolio value
		= $415 million - $15 million
		=$400 million
Notes:	Net asset value = $5 taken from a.
b-2.	Shares outstanding decreases to 77 million
Working Notes:
	New shares outstanding = old shares outstanding - no of shares redeem
		= 80 million - 3 million
		=77 million
b-3.	Net Asset value = $5
	Net Asset value = (new Portfolio value - Liabilities )/No of shares outstanding
	Net Asset value = ($400 million -$15 million )/ 77 million
	Net Asset value = $385 million / 77 million
	Net Asset value = $5
Please feel free to ask if anything about above solution in comment section of the question.