Portfolio managers are frequently paid a proportion of the funds under managemen
ID: 2637026 • Letter: P
Question
Portfolio managers are frequently paid a proportion of the funds under management. Suppose you manage a $107 million equity portfolio offering an end-of-year dividend yield (DIV1/P0 ) of 5.7%. Dividends and portfolio value are expected to grow at a constant rate. Your annual fee for managing this portfolio is 0.57% of portfolio value and is calculated at the end of each year.
Assuming that you will continue to manage the portfolio from now to eternity, what is the present value of the management contract? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)
What would the contract value be, if you invested in stocks with a 4.7% yield? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
a.
Assuming that you will continue to manage the portfolio from now to eternity, what is the present value of the management contract? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)
Explanation / Answer
a. Present value ( Perpetuity value) = Contract amount / interest rate = .6099 million / .057
= 10.7 Million
b. present value ( perpetuity value at 4.7%) = .6099 million / 4.7% = 12.976 Million
by the way second problem is not clear . above answer of b is based on my assumtion that it is simialr to problem (a)