4. A mutual fund portfolio currently is worth $ 800 million. During the year, th

Question

4. A mutual fund portfolio currently is worth $ 800 million. During the year, the fund sells stocks worth of 200 million and realizes the long term capital gains of $50 million. The fund uses all of the proceeds to buy common stocks of different companies. The fund has current liabilities of $2 million and 20 million shares outstanding. You own 1,500 shares of the mutual fund. (20 points)

a. What was the portfolio turnover rate?

b. What is the net asset value of the fund?
c. What is your portfolio worth?

d. If your tax rate on long term capital gains income is 15%, how much extra you will owe on this year’s taxes as a result of these transactions?

e. If in December the NAV of the fund depreciates 10 percent, what is your end of year portfolio worth? Do you still need to pay taxes calculated in part (d)? If yes, what can you do to legally avoid paying these taxes?

Explanation / Answer

Solution: (a) Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of securities sold - whichever is less - over a particular period, divided by the total net asset value (NAV) of the fund. So New securities purchased = $250 Securities sold = $200 Lower is = $200 Portfolio turnover rate = 200/848 = 23.59% (b) Calculation of nav ($ million) opening NAV 800 (-) Sale 200 (+) Purchase new stock 250 (-) current liability 2 Closing nav 848 NAV per share = 848/20 42.4 ( c) Portfolio worth = 1500 share * 42.4 = 63600 (d) Extra tax payable as a result of long term capital gains = = 50*15% = =$7.5 million Note : As per policy I have answered first 4 subparts of the question. Solution: (a) Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of securities sold - whichever is less - over a particular period, divided by the total net asset value (NAV) of the fund. So New securities purchased = $250 Securities sold = $200 Lower is = $200 Portfolio turnover rate = 200/848 = 23.59% (b) Calculation of nav ($ million) opening NAV 800 (-) Sale 200 (+) Purchase new stock 250 (-) current liability 2 Closing nav 848 NAV per share = 848/20 42.4 ( c) Portfolio worth = 1500 share * 42.4 = 63600 (d) Extra tax payable as a result of long term capital gains = = 50*15% = =$7.5 million Note : As per policy I have answered first 4 subparts of the question.

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