CIFC Exam Dumps | Sean purchases 500 units of Penn Canadian Equity Fund when the net asset value per unit (NAVPU) is $16.70.

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Question 48/72

Sean purchases 500 units of Penn Canadian Equity Fund when the net asset value per unit (NAVPU) is
$16.70. On December 15, the mutual fund's NAVPU is $21. On December 16, the mutual fund declares a distribution of $1.25 per unit. Sean's distribution is immediately reinvested and he purchases additional units of the mutual fund.
Which of the following statements about the effect of the distribution is correct?

A. After the distribution. Sean will have J&625 in cash and JB8.350 worth of the Penn Canadian Equity Fund.

B. The total value of Sean's mutual fund holdings after the distribution and reinvestment is §9,875.

C. The NAVPU of the mutual fund does not change after the distribution since Sean reinvests his distribution and purchases additional units.

D. Sean's distribution is reinvested at a NAVPU of $19.75 and he receives approximately 31.65 additional units.

Correct Answer: D

Explanation
Sean's distribution is reinvested at a NAVPU of $19.75 and he receives approximately 31.65 additional units.
When a mutual fund declares a distribution, it reduces its NAVPU by the amount of the distribution per unit.
In this case, the NAVPU drops from $21 to $19.75 after the distribution of $1.25 per unit. Sean's distribution is $625 ($1.25 x 500 units), which he reinvests in the mutual fund at the new NAVPU of $19.75. He receives

additional units. The total value of Sean's mutual fund holdings after the distribution and reinvestment is (500+31.65)×19.75=$10,500
, not $9,875. The NAVPU of the mutual fund does change after the distribution, regardless of whether Sean reinvests his distribution or not. References: [Unit 7: Mutual Funds Administration]

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