Portfolio managers are frequently paid a proportion of the funds under managemen

Question

Portfolio managers are frequently paid a proportion of the funds under management. Suppose you manage a $117 million equity portfolio offering a dividend yield DIV/ Po of 6.7%. Dividends and portfolio value are expected to grow at a constant rate. Your annua fee or mana ng his ol s % of portfo value and is a culated at the end of ac year. 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 mllions rounded to 2 decimal places.) Present value b. What would the contract value be you nvested in stocks with a 5 7% yield? Do not round inte mediate ca culations. Enter you answer in millions rounded to million ima places.) Contract value million

Explanation / Answer

1. Present Value of Contract = Annual fee / Dividend Yield

Present Value of Contract = 117 * 0.0067 / 0.067

Present Value of Contract = $11.70 Million

2. Value of Contract = Annual fee / New Dividend Yield

Value of Contract = 117 * 0.0067 / 0.057

Value of Contract = $13.75 Million

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