Question

? ? save & Exit )(Submit Question 4 (of 4) ? > value: 25.00 points An investment fund has the following assets in its portfolio: $38 million in fixed-income securities and $38 million in stocks at current market values. In the event of a liquidity crisis, it can sell its assets at a 94 percent discount if they are disposed of in five days. It will receive 96 percent if disposed of in seven days Two shareholders, A and B, own 6 percent and 8 percent of equity (shares), respectively. a. Market uncertainty has caused shareholders to sell their shares back to the investment fund. What will the two shareholders receive if the investment fund must sell all its assets in five days? In seven days? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. (e.g., 32.16) million S million S million Five days Seven days million References eBook & Resources Worksheet Difficuilty: Mediunm y work

Answer 1

(a) The investment fund has $ 38 million in fixed-income securities and another equal amount in stocks at current market value. Total Investment Fund asset value is $ 76 million and ownership of this asset is divided into investment fund shares, 6 % of which is owned by A and 8 % by B. Liquidation in 5 days implies a discounted asset value of 94 % and in 7 days implies a discounted asset value of 96 %.

Asset Value in 5 day liquidation = 0.94 x 76 = $ 71.44 million and Asset Value in 7 day liquidation = 0.96 x 76 = $ 72.96 million

In 5 day liquidation, A will receive = 0.06 x 71.44 = $ 4.29 million and B will receive = 0.08 x 71.44 = $ 5.71 million

In 7 day liquidation, A will receive = 0.06 x 72.96 = $ 4.38 million and B will receive = 0.08 x 72.96 = $ 5.84 million