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A mutual fund has 1,000 shares of Doggie Corp
A mutual fund has 1,000 shares of Doggie Corp. currently trading at $10, and 500 shares of Kitty, Inc., currently trading at $15. The fund has 2,000 shares outstanding. Investors expect the price of Doggie Corp. to increase to $14 and the price of Kitty Inc. to decline by the end of the year. Thus a new NAV.
Assume that the price of Doggie Corp. shares is realized at $14. What is the maximum price to which Kitty Inc. can decline and still maintain the original NAV?
A.$ 7.00
B.$15.45
C.$8.75
D.$12.45
Expert Solution
Computation of Maximum Price to which Kitty Inc. can decline and still maintain the original NAV:
Let the maximum price be x
(1000*10+500*15)/2000 = (1000*14+500*x)/2000
17500/2000 = (14000+500x)/2000
8.75 = (14000+500x)/2000
17500 = 14000+500x
17500-14000 = 500x
3500 = 500x
x = 3500/5
x= $7
So, Maximum Price to which Kitty Inc. can decline and still maintain the original NAV is $7.
The correct option is A "$7".
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