Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid–ask spreads amount to 2.7% of the value of the trade. If the portfolio turnover rate is 50%, by how much is the total return of the portfolio reduced by trading costs? (Round your answer to 1 decimal place.)

Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid–ask spreads amount to 2.7% of the value of the trade. If the portfolio turnover rate is 50%, by how much is the total return of the portfolio reduced by trading costs? (Round your answer to 1 decimal place.)

Fall in returns

%

Explanation:

The turnover rate is 50%. This means that, on average, 50% of the portfolio is sold and replaced with other securities each year. Trading costs on the sell orders are 2.7%; the buy orders to replace those securities entail another 2.7% in trading costs. Total trading costs will reduce portfolio returns by: 2 × 0.027 × 0.5 = 0.027 or 2.7%

The Investments Fund sells Class A shares with a front-end load of 6% and Class B shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth year). Assume the portfolio rate of return net of operating expenses is 10% annually.

The Investments Fund sells Class A shares with a front-end load of 6% and Class B shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth year). Assume the portfolio rate of return net of operating expenses is 10% annually.

a.	If you plan to sell the fund after four years, are Class A or Class B shares the better choice for you?
	Class B

b.	What if you plan to sell after 15 years?
	Class A

Explanation:

a. 

Suppose you have $1000 to invest. The initial investment in Class A shares is $940 net of the front-end load. After 4 years, your portfolio will be worth:

$940 × (1.10)4 = $1,376.25

Class B shares allow you to invest the full $1,000, but your investment performance net of 12b-1 fees will be only 9.5%, and you will pay a 1% back-end load fee if you sell after 4 years. Your portfolio value after 4 years will be:

$1,000 × (1.095)4 = $1,437.66

After paying the back-end load fee, your portfolio value will be:

$1,437.66 × 0.99 = $1,423.28

Class B shares are the better choice if your horizon is 4 years.

b.

With a 15-year horizon, the Class A shares will be worth:

$940 × (1.10)15 = $3,926.61

For the Class B shares, there is no back-end load in this case since the horizon is greater than 5 years. Therefore, the value of the Class B shares will be:

$1,000 × (1.095)15 = $3,901.32

At this longer horizon, Class B shares are no longer the better choice. The effect of Class B's 0.5% 12b-1 fees cumulates over time and finally overwhelms the 6% load charged to Class A investors.

Consider a mutual fund with $203 million in assets at the start of the year and with 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $5 million. The stocks included in the fund's portfolio increase in price by 7%, but no securities are sold, and there are no capital gains distributions. The fund charges 12b-1 fees of 0.75%, which are deducted from portfolio assets at year-end.

Consider a mutual fund with $203 million in assets at the start of the year and with 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $5 million. The stocks included in the fund's portfolio increase in price by 7%, but no securities are sold, and there are no capital gains distributions. The fund charges 12b-1 fees of 0.75%, which are deducted from portfolio assets at year-end.

a.	What is net asset value at the start and end of the year? (Enter your answers in dollars rounded to 3 decimal places.)

 

	Net Asset Value
Start of the year	$
End of the year

   

b.	What is the rate of return for an investor in the fund? (Use rounded "Net Asset Value". Round your answer to 2 decimal places.)

 

Rate of return

%

Explanation:

a.

Start of year NAV =	Market value of assets − Market value of liabilities
	Shares outstanding

=	$203,000,000	= $20.300
	10,000,000

End of year NAV is based on the 7% price gain, less the 0.75% 12b-1 fee:

End of year NAV = $20.300 × 1.07 × (1 − 0.0075) = $21.558

b.

Given the dividends per share is $0.50, we can calculate the rate of return using the following equation:

Rate of return =	Δ(NAV) + Distributions
	Start of year NAV

=	($21.558 − $20.300) + $0.50	= 0.0866 = 8.66%
	$20.300

The Closed Fund is a closed-end investment company with a portfolio currently worth $215 million. It has liabilities of $6 million and 4 million shares outstanding.

The Closed Fund is a closed-end investment company with a portfolio currently worth $215 million. It has liabilities of $6 million and 4 million shares outstanding.

a.	What is the NAV of the fund? (Round your answer to 2 decimal places.)

NAV

$

b.	If the fund sells for $49 per share, what is its premium or discount as a percent of NAV? (Input the amount as a positive value. Round your answer to 2 decimal places.)

The fund sells at an % Discount from NAV.

Explanation: a.

NAV =	Market value of assets – Market value of liabilities
	Shares outstanding

=		$215,000,000 – $6,000,000	= $52.25
		4,000,000

b.

Premium (or discount) =		Price – NAV	=	$49 – $52.25	= –0.0622 = –6.22%
		NAV		$52.25

The fund sells at an 6.22% discount from NAV.

An open-end fund has a net asset value of $11.40 per share. It is sold with a front-end load of 7%. What is the offering price?

An open-end fund has a net asset value of $11.40 per share. It is sold with a front-end load of 7%. What is the offering price? (Round your answer to 2 decimal places.)

Offering price

$

Explanation:

The offering price includes a 7% front-end load, or sales commission, meaning that every dollar paid results in only $0.93 going toward the purchase of shares. Therefore:

 

Offering price =	NAV	=	$11.40	= $12.26
	1 − load		1 − 0.07

Escher Company is a wholesale distributor that uses activity-based costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Escher Company is a wholesale distributor that uses activity-based costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:
Wages and salaries	$552,000
Other expenses	220,000
Total	$772,000

Distribution of resource consumption
	Activity Cost Pools
	Filling Orders	Customer Support	Other	Total
Wages and salaries	40%	55%	5%	100%
Other expenses	50%	45%	5%	100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. The amount of activity for the year is as follows:

Activity Cost Pool	Activity
Filling orders	5,400	orders
Customer support	22	customers

What would be the total overhead cost per order according to the activity based costing system? In otherwords, what would be the overall activity rate for the filling orders activity cost pool?

	$63.26
	$61.26
	$58.76
	$67.76

Allocations to the Filling Orders activity cost pool:

Wages and salaries (40% × $552,000)	$220,800
Customer support (50% × $220,000)	110,000
Total cost of filling orders	$330,800

Cost per order = Total cost of filling orders ÷ Number of orders

= $330,800 ÷ 5,400 orders = $61.26 per order

Capizzi Corporation has an activity-based costing system with three activity cost pools-Machining, Order Filling, and Other. In the first stage allocations, costs in the two overhead accounts, equipment depreciation and supervisory expense, are allocated to three activity cost pools based on resource consumption. Data used in the first stage allocations follow:

Capizzi Corporation has an activity-based costing system with three activity cost pools-Machining, Order Filling, and Other. In the first stage allocations, costs in the two overhead accounts, equipment depreciation and supervisory expense, are allocated to three activity cost pools based on resource consumption. Data used in the first stage allocations follow:

Overhead costs:
Equipment depreciation	$81,200
Supervisory expense	$7,000

Distribution of Resource Consumption Across Activity Cost Pools:
	Activity Cost Pools
	Machining	Order Filling	Other
Equipment depreciation	0.50	0.20	0.30
Supervisory expense	0.50	0.10	0.40

Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow:

Activity:
	MHs (Machining)	Batches (Order Filling)
Product Y7	1,680	860
Product V2	9,710	2,240
Total	11,390	3,100

What is the overhead cost assigned to Product V2 under activity-based costing? (Round your intermediate calculations to 2 decimal places.)

	$37,578
	$49,808
	$12,230
	$60,340

Machining: $44,100 ÷ 11,390 MHs = $3.87 per MH

Order Filling: $16,940 ÷ 3,100 orders = $5.46 per order

Overhead cost for Product V2:

Machining $3.87 per MH × 9,710 MHs	$37,577.70
Order Filling $5.46 per order × 2,240 orders	12,230.40
Total	$49,808.10

Fogle Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Fogle Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:
Wages and salaries	$128,000
Other expenses	64,000
Total	$192,000

Distribution of resource consumption:
	Activity Cost Pools
	Making Bouquets	Delivery	Other	Total
Wages and salaries	60%	30%	10%	100%
Other expenses	45%	50%	5%	100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool	Activity
Making bouquets	57,390 bouquets
Delivery	12,500 deliveries

What would be the total overhead cost per delivery according to the activity based costing system? In other words, what would be the overall activity rate for the deliveries activity cost pool?

	$6.49
	$5.20
	$3.92
	$5.63

Allocations to the Delivery activity cost pool:

Wages and salaries (30% × $128,000)	$38,400
Other expenses (50% × $64,000)	32,000
Total cost	$70,400

Overhead cost per delivery = Total cost ÷ Number of deliveries

= $70,400 ÷ 12,500 deliveries

= $5.63 per delivery

Matt Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 8,000 units and of Product B is 7,000 units. There are three activity cost pools, with total cost and total activity as follows:

Matt Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 8,000 units and of Product B is 7,000 units. There are three activity cost pools, with total cost and total activity as follows:

		Total Activity
Activity Cost Pool	Total Cost	Product A	Product B	Total
Activity 1	$28,600	120	530	650
Activity 2	$42,550	920	230	1,150
Activity 3	$129,340	840	3,620	4,460

The activity-based costing cost per unit of Product A is closest to: (Round your intermediate calculations to 2 decimal places.)

	$2.46
	$7.96
	$5.76
	$12.65

The activity rates for each activity cost pool are computed as follows:

	Total Cost	Total Activity	Activity Rate
Activity 1	$28,600	650	$44.00
Activity 2	$42,550	1,150	$37.00
Activity 3	$129,340	4,460	$29.00

The overhead cost charged to Product A is:

	Activity Rate	Activity	ABC Cost
Activity 1	$44.00	120	$5,280
Activity 2	$37.00	920	$34,040
Activity 3	$29.00	840	$24,360
			$63,680

Cost per unit = $63,680 ÷ 8,000 units = $7.96 per unit

Spendlove Corporation has provided the following data from its activity-based costing system:

Spendlove Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool	Total Cost	Total Activity
Assembly	$1,660,260	59,000	machine-hours
Processing orders	$69,455.70	2,290	orders
Inspection	$126,338	1,810	inspection-hours

The company makes 780 units of product S78N a year, requiring a total of 1,140 machine-hours, 64 orders, and 36 inspection-hours per year. The product's direct materials cost is $58.21 per unit and its direct labor cost is $14.69 per unit. The product sells for $124.00 per unit.

According to the activity-based costing system, the product margin for product S78N is: (Round your intermediate calculations to 2 decimal places.)

	$39,858.00
	$3,324.48
	$5,265.60
	$5,837.28

The activity rates for each activity cost pool are computed as follows:

	Total Cost	Total Activity		Activity Rate
Assembly	$1,660,260	59,000	machine-hours	$28.14	per machine-hour
Processing orders	$69,456	2,290	orders	$30.33	per order
Inspection	$126,338	1,810	inspection-hours	$69.80	per inspection-hour

The overhead cost charged to Product S78N is:

	Activity Rate		Activity		ABC Cost
Assembly	$28.14	per machine-hour	1,140	machine-hours	$32,079.60
Processing orders	$30.33	per order	64	orders	1,941.12
Inspection	$69.80	per inspection-hour	36	inspection-hours	2,512.80
Total overhead cost					$36,533.52

Sales (780 units × $124.00 per unit)		$96,720.00
Direct materials (780 units × $58.21 per unit)	$45,403.80
Direct labor (780 units × $14.69 per unit)	11,458.20
Overhead	36,533.52	93,395.52
Product margin		$3,324.48

Yedder Enterprises was a pioneer in designing and producing precision surgical lasers. Yedder’s product was brilliantly designed, but the manufacturing process was neglected by management with a consequence that quality problems have been chronic.

Yedder Enterprises was a pioneer in designing and producing precision surgical lasers. Yedder’s product was brilliantly designed, but the manufacturing process was neglected by management with a consequence that quality problems have been chronic. When customers complained about defective units, Yedder would simply send out a repairperson or replace the defective unit with a new one. Recently, several competitors came out with similar products without Yedder’s quality problems, and as a consequence Yedder’s sales have declined.

To rescue the situation, Yedder embarked on an intensive campaign to strengthen its quality control at the beginning of the current year. These efforts met with some success—the downward slide in sales was reversed, and sales grew from $90 million last year to $100 million this year. To help monitor the company’s progress, costs relating to quality and quality control were compiled for last year and for the first full year of the quality campaign this year. The costs, which do not include the lost sales due to a reputation for poor quality, appear below:

	Costs (in thousands)
	Last Year		This Year
Product recalls	$	2,592	$	600
Systems development	$	522	$	950
Inspection	$	828	$	1,240
Net cost of scrap	$	693	$	1,470
Supplies used in testing	$	27	$	100
Warranty repairs	$	4,374	$	1,440
Rework labor	$	1,170	$	2,000
Statistical process control	$	0	$	170
Customer returns of defective goods	$	1,521	$	1,110
Cost of testing equipment	$	180	$	360
Quality engineering	$	504	$	820
Downtime due to quality problems	$	855	$	1,300

Required:

1.	Prepare a quality cost report for both this year and last year. (Round your percentage answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" and "%" signs in your response.)

Yedder Enterprises Quality Cost Report (in thousands of dollars)
	Last Year		This Year
	Amount         (000s)	Percent of Sales	Amount         (000s)	Percent of Sales
Prevention Costs:
Systems development	$	%	$	%
Statistical process control		%		%
Quality engineering		%		%
Total prevention costs		%		%
Appraisal Costs:
Inspection		%		%
Supplies used in testing		%		%
Cost of testing equipment		%		%
Total appraisal costs		%		%
Internal failure costs:
Net cost of scrap		%		%
Rework labor		%		%
Downtime due to quality problems		%		%
Total internal failure costs		%		%
External failure costs:
Product recalls		%		%
Warranty repairs		%		%
Customer returns of defective goods		%		%
Total external failure costs		%		%
Total quality cost	$	%	$	%