Assume that you are a portfolio manager with Flametree Fund Management. The fund management company pays its fund managers a proportion of the funds under management. You manage a $200 million stock portfolio which offers a dividend yield D1/P0 of 6% to investors. Dividends and the value of the portfolio are expected to grow at a constant rate. The annual management fee charged is 0.30% of the portfolio value and is calculated at the end of each year.

Assume that the fund will continue to be managed by your firm from now till eternity. Compute the present value of the management contract. Critically analyse how the value of management contract changes if the dividend yield offered is lower at 5%

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To compute the present value of the management contract we need to calculate the present value of th... View the full answer