Question

If an investor buys shares in a closed-end investment company for $46 and the net asset value is $53, what is the discount? If the company distributes $1, the net asset value rises to $58, and the investor sells the shares for a premium of 5 percent over the net asset value, what is the percentage earned on the
investment?

Answer 1

To calculate the discount, we need to find the difference between the market price of the shares and the net asset value (NAV) per share. Then, we can calculate the percentage earned on the investment when the investor sells the shares at a premium.

1. Calculate the discount:

Discount = NAV per share - Market price per share

Given that the NAV is $53 and the market price is $46:

Discount = $53 - $46 = $7

So, the discount is $7 per share.

2. Calculate the new NAV after the distribution:

When the company distributes $1 per share, the NAV rises to $58.

3. Calculate the selling price per share:

The investor sells the shares at a premium of 5 percent over the new NAV of $58.

Selling price per share = NAV per share + (5% of NAV per share)

Selling price per share = $58 + (0.05 * $58) = $58 + $2.90 = $60.90

4. Calculate the percentage earned on the investment:

Percentage earned = ((Selling price - Cost price) / Cost price) * 100

Cost price = Market price per share = $46

Selling price = $60.90

Percentage earned = (($60.90 - $46) / $46) * 100

Percentage earned = ($14.90 / $46) * 100

Percentage earned ≈ 32.39%

So, the percentage earned on the investment is approximately 32.39%.