What is the net asset value (NAV) of a mutual fund that has assets of $10 million, liabilities of $3 million and 1 million shares?
The net asset value (NAV) of the mutual fund is $7.
The NAV is calculated by subtracting total liabilities from total assets and then dividing by the number of shares outstanding. In this case, the NAV is ($10 million - $3 million) / 1 million shares = $7 per share.
This choice represents an incorrect calculation of NAV. If the liabilities were higher or the assets lower, one might arrive at this figure, but with the given values, the calculation clearly shows a NAV of $7.
This is the correct calculation of NAV. By subtracting the liabilities of $3 million from the assets of $10 million, we obtain $7 million in net assets, which, when divided by the 1 million shares, results in an NAV of $7 per share.
Choosing $10 would imply that the fund has no liabilities, which is not the case here. The actual NAV takes liabilities into account, and therefore, this choice incorrectly overlooks the impact of the $3 million in liabilities on the total asset value.
This option suggests a miscalculation where the liabilities are not factored in appropriately. To arrive at $14, one would incorrectly assume either an inflated asset value or a drastically reduced share count, neither of which applies to the given scenario.
The net asset value (NAV) of a mutual fund is a key metric for investors, reflecting the per-share value derived from total assets minus liabilities. In this case, the correct NAV calculation yields $7, accurately reflecting the fund's financial position based on the provided asset and liability figures. Understanding NAV is essential for making informed investment decisions in mutual funds.
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