Question

Use the following information to answer the following questions. Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in its portfolio: 100 shares of Procter & Gamble (P&G) priced at $30.00, 300 shares of Intel priced at $50.00 and 200 shares of Microsoft priced at $60.00. The Morningstar closed-end fund has the following stocks in its portfolio: 300 shares of P&G and 300 shares of Microsoft. It has a total of 500 shares outstanding.

a) What is the NAV of both funds?

b) To what level should the price of Microsoft shares decline in order for the NAV of Morningstar fund to remain constant if the price of P&G rises to $40?

c) If the price of P&G shares rises to $35 and the price of Microsoft falls to $40.00, what is the new NAV of both funds? Assume Eveningstar has 1,000 shares outstanding, and 300 shares of Intel.

Answer 1

Answer : (a.) Calculation of NAV of Both Funds :

NAV = Total Value of Assets / Number of units outsatnding

NAV of Evening star Mutual fund =[(100 * 30) + (300 * 50) + (200 * 60)] / 1000

= 30000 / 1000

= 30

NAV of Morning star Mutual fund =[(300 * 30) + (300 * 60)] / 500

= 27000 / 500

= 54

(b.) Calculation of Level of Price

Let Price of Microsoft shares be x

54 = [(300 * 40) + (300 * x)] / 500

54 * 500 = 12000 + 300x

==> x = (27000 - 12000) / 300

= 50

(c.) Calculation of New NAV

NAV of Evening star Mutual fund =[(100 * 35+ (300 * 50) + (200 * 40)] / 1000

= 26500 / 1000

= 26.5

NAV of Morning star Mutual fund =[(300 * 35) + (300 * 40)] / 500

= 22500 / 500

= 45