You purchased 3,800 shares in the New Pacific Growth Fund on January 2, 2010, at

Question

You purchased 3,800 shares in the New Pacific Growth Fund on January 2, 2010, at an offering price of $42.00 per share. The front-end load for this fund is 5 percent, and the back-end load for redemptions within one year is 2 percent. The underlying assets in this mutual fund appreciate (including reinvested dividends) by 6 percent during 2010, and you sell back your shares at the end of the year. If the operating expense ratio for the New Pacific Growth Fund is 1.77 percent, what is your total return from this investment? Assume that the annual expense ratio is netted out of the fund's return. (Negative value should be indicated by a minus sign. Do not round intermediate

Explanation / Answer

To calculate the total return, we will have to determine the initial NAV, Final NAV and Sales Proceeds Per Share. The value of initial NAV, Final NAV and Sales Proceeds can be calculated with the use of following formula:

Initial NAV = Offering Price*(1-Front-End Load)

Final NAV = Offering Price*[1+(Appreciation Rate - Operating Expense Ratio)]

Sales Proceeds Per Share = Final NAV*(1- Back-End Load)

________

The formula for calculating total return is:

Total Return = (Sales Proceeds - Initial NAV)/Initial NAV*100

________

Using the values provided in the question, we get,

Initial NAV = 42*(1-5%) = $39.90

Final NAV = 39.90*[1+(6% - 1.77%)] = $41.59

Sales Proceeds Per Share = 41.59*(1-2%) = $40.76

________

Total Return = (40.76 - 39.90)/39.90*100 = 2.15% (answer)

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