Stock 3 announces record earnings, and the price of stock 3 jumps to $32.44 in after-market trading. If the fund (illegally) allows investors to buy at the current NAV, how many shares will $25,000 buy? If the fund waits until the price adjusts, how many shares can be purchased? What is the gain to such illegal trades? Assume 5,000 shares are outstanding.

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Stock 3 announces record earnings, and the price of stock 3 jumps to $32.44 in after-market trading. If the fund (illegally) allows investors to buy at the current NAV, how many shares will $25,000 buy? If the fund waits until the price adjusts, how many shares can be purchased? What is the gain to such illegal trades? Assume 5,000 shares are outstanding.

On January 1st, the shares and prices for a mutual fund at 4:00 pm are:

StockShares ownedPrice
11,000$ 1.92
25,000$ 51.18
32,800$ 29.08
49,200$ 67.19
53,000$ 4.51
cashn.a.$ 5,353.40

EXPERT ANSWER

Given Information

No of Mutual Fund Shares = 5000

StockShares
Owned
Price
11,0001.92
25,00051.18
32,80029.08
49,20067.19
53,0004.51
Cashna5,353.40

Mutual Fund NAV per share at 4 PM = (1000*1.92+5000*51.18+2800*29.08+9200*67.19+3000*4.51)/5000

= 976,275.40/5000 = 195.26 per share

So No of shares bought by $25,000 (before adjustment) = 25000/195.26 = 128.038 shares

After price adjustment of Stock 3,

New NAV per share = (1000*1.92+5000*51.18+2800*32.44+9200*67.19+3000*4.51)/5000

= 985,683.40 /5000 = 197.14 per share

So No of shares bought by $25,000 (after adjustment) = 25000/197.14 = 126.816 shares

The investor invests 25000 before adjustment of NAV and gets 128.038 shares

Total No of shares = 5000+128.038 = 5,128.038

Total NAV after price adjustment and inflow of 25000 = 985,683.40 + 25000 = 1,010,683.40

Value of investors investment = (1,010,683.40/5128.038)*128.038 = 25,234.90

Gain ($) = 25,234.90 – 25000 = 234.90

Gain(%) = 234.90/25000 = 0.940%