A year ago, you purchased 400 shares of a mutual fund at a NAV of $41.90. During

Question

A year ago, you purchased 400 shares of a mutual fund at a NAV of $41.90. During the year, the fund paid dividends of $2.10 per share and had a capital gains distribution of $0.60 per share. The fund currently has a NAV of $44.40. Show work for all parts of this question.

a.    Find your holding period return, assuming the dividends and capital gains are paid to you rather than reinvested. Express your answers as a percent rounded to two decimal places.

b.    If instead you are going to reinvest dividends and capital gains, what dollar amount is reinvested in total? If reinvestment occurs at an average price of $43.20, how many additional shares will you obtain?

c.    Find your holding period return, assuming the dividends and capital gains were reinvested as indicated in the previous part. Express your answers as a percent rounded to two decimal places.

Explanation / Answer

Solution:

a) Holding Period Return = [ Dividend + capital gain distribution + (Beginning NAV - Ending NAV) ] / beginning NAV x 100

= [$2.10 + $0.60 + ($44.40 - $41.90)] / 41.90 x 100 = 12.41%

b)

Dollar amount reinvested = Dividend + Capital Gain distribution = $2.10 + $0.60 = $2.70

Additional Shares reivested per 1 share = $2.70 / 43.20 = 0.0625 Shares

Total Additional Shares obtained = 0.0625 x 400 Shares = 25 Shares

c)

If you have 1 share at the beginning, how it will be come (1+ 0.0625) shares at the end after re-investment.

Holding Period Return = [(Ending Shares x Ending NAV) - (Beginning Shares x Beginning NAV)] / (Beginning Shares x Beginning NAV) x 100

= [(1.0625 x 44.40) - 41.90] / 41.90 x 100

= (47.175 - 41.90) / 41.90 x 100

= 12.59%

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