Reference no: EM132656401
(1) You are considering an investment in a mutual fund with a 4% front-end load. The fund charges a back-end load of 5, 4, 3, 2, and 1 percent if the shares are redeemed within the first 5 years, respectively. The expense ratio of 0.5%. Alternatively, you can invest instead in a bank saving account paying 6% interest per year.
a. If you plan to invest for 3 years, what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the bank saving account? Assume annual compounding of returns.
b. How does your answer change if you plan to invest for six years? Why does your answer change?
c. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 0.75% per year. The back-end load will be 5, 4, 3, 2, and 1 percent if the shares are redeemed within the first 5 years, respectively. Then what annual rate of return must the fund portfolio earn for you to be better off in the fund than in the bank saving account if you plan to invest in 10 years?
(2) AXP just paid a dividend of $0.80 per share and analysts forecasted five-year growth rates of 10.54 percent per year for AXP and 13.21 percent per year for the industry average. Assume the growth rate for the industry average will remain constant. Then, assuming AXP's growth rate will revert to the industry average after five years, what share price would we place on AXP today, if we use a discount rate of 15 percent per year?