Question

At the beginning of the year, you buy 800 shares in Muleshoe Mutual Fund, which currently has a NAV of $48.10. The fund has a front-end load of 1.8%. Over the year, the fund distributed capital gains of $1.75 per share and dividend distributions of $1.42. At the end of the year, the NAV was at $54.47 and the offer price was at $55.45.

A. If you sell after one year, what is your HPR?

B. Recalculate your HPR, assuming you bought 800 shares at the beginning of the year, reinvested all your distributions at an average price of $51, and sold your shares at the end of the year.

Answer 1

Part a)

Front-end load per share = Current NAV*1.8% = 48.1*1.8% = 0.8658

Purchase cost per share = Current NAV+Front-end load = 48.1+0.8658 = 48.9658

Note: Shares in Mutual fund will be sold at offer price which may be different from last closing NAV.

Holding period return (HPR) = (Offer price+Capital gain+Dividend-Purchase cost per share)/Purchase cost per share = (55.45+1.75+1.42-48.9658)/48.9658 = 9.6542/48.9658 = 19.72%

Part b)

Purchase cost = Purchase cost per share*800shares = 48.9658*800 = $39,172.64

Total capital gain & dividend = 800shares*(1.75+1.42) = 800*3.17 = 2536

Reinvested shares = Total capital gain & dividend/Average price = 2536/51 = 49.73

(Note: Partial units/shares is allowed in mutual fund)

Sale value = Total shares*offer price = 849.73*$55.45 = $47,117.53

Holding period return (HPR) = (Sale value-purchase cost)/Purchase cost = (47,117.53-39,172.64)/39,172.64 = 7,944.89/39,172.64 = 20.28%