Question

Suppose that at the start of the year, no-load mutual fund has a net asset value of $27.80 per share. During the year, it pays its shareholders a capital gain and dividend distribution of $1.16 per share and finishes the year with an NAV of $30.18. a. What is the return to an investor who holds 258.156 shares of this fund his (nontaxable) retirement account? Do not round intermediate calculations. Round your answer to two decimal places. b. What is the after-tax return for the same investor if these shares were held in an ordinary savings account? Assume that the investor is in the 30% tax bracket. Do not round intermediate calculations. Round your answer to two decimal places c. If the investment company allowed the investor to automatically reinvest his cash distribution in additional fund shares, how many additional shares could the investor acquire? Assume that the distribution occurred at year end and that the proceeds from the distribution can be reinvested at the year-end NAV. Do not round intermediate calculations. Round your answers to three decimal places Nontaxable distribution: shares Taxable distribution shares

Answer 1

a. Number of shares = 258.156
NAV at beginning of year = $27.80
Value of investment at beginning of year = $7,176.74
Dividend income at year end = $1.16 per share
Total dividend income = $299.46
NAV at end of year = $30.18
Value of investment at end of year = $7,791.15
Profit in the year = $7,791.15 + $299.46 - $7,176.74 = $913.87
%return to the investor = $913.87 / $7,176.74 = 0.1273 = 12.73%

b. Number of shares = 258.156
NAV at beginning of year = $27.80
Value of investment at beginning of year = $7,176.74
Dividend income at year end = $1.16 per share
Total dividend income = $299.46
Tax on dividend income = $299.46 * 0.3 = $89.84
NAV at end of year = $30.18
Value of investment at end of year = $7,791.15
Profit in the year = $7,791.15 + $299.46 - $7,176.74 - $89.84 = $824.03
%return to the investor = $824.03 / $7,176.74 = 0.1148 = 11.48%

c. Nontaxable distribution :
Number of shares at beginning of year = 258.156
Dividend income at year end = $1.16 per share
Total dividend income = $299.46
NAV at end of year = $30.18
Additional share to be acquired = $299.46/$30.18 = 9.922

Taxable distribution :
Number of shares at beginning of year = 258.156
Dividend income at year end = $1.16 per share
Total dividend income = $299.46
Tax on dividend income = $299.46 * 0.30 = $89.84
Total fund available to acquire additional shares = $299.46 - $89.84 = $209.62
NAV at end of year = $30.18
Additional share to be acquired = $209.62/$30.18 = 6.946