An investment fund has the following assets in its portfolio: $38 million in fix

Question

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))

A B
Five days $ million $ million

Seven days $ million $ million

Explanation / Answer

Answer:

Shareholder A will receive $71.44 m x 0.06 = $4.29 m down from the current value of $4.56 m.

Shareholder B will receive $71.44 m x 0.08 = $5.72 m down from the current value of $6.08 m

Shareholder A will receive $72.96 m x 0.06 = $4.38 m down from the current value of $4.56 m.

Shareholder B will receive $72.96 m x 0.08 = $5.84 m down from the current value of $6.08 m

Amount in million Value of fixed-income securities if sold in five days $38 million*0.94 35.72 Value of stocks if sold in five days $38 million*0.94 35.72 Total 71.44

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