2. According to the Rule of 72, how many years would it take for an investment t

Question

2. According to the Rule of 72, how many years would it take for an investment to double if it grows at an annual rate of 4 percent? 3. Consider the following financial information for Atlas Awesome Manufacturing, Inc., and Delilah Superior Manufacturing, Inc. Both companies are in the same industry and have identical operating income of $8.4 million. Atlas finances its $15 million in assets with $2 million in debt (on which it pays 9 percent interest) and $13 million in equity. Delilah finances its $15 million in assets with $12 million in debt (on which it pays 8 percent interest). Both companies pay 32 percent tax on their taxable income. Calculate the following: *Each firm's net income " The income each firm has available to pay its debtholders and stockholders (the firm's asset funders) " The returns available to the asset funders on their investment in each company (the return on asset-funders' investment) Which company offers a higher return on investment to its asset funders? Explain why this company is able to offer a higher return on investment to its asset funders

Explanation / Answer

(2) The rule of 72 states that in order to calculate the approximate amount of time required to double an initial investment at an annual rate of say R %, one has to divide 72 by R

Therefore, in this case Annual Rate = 4%

Therefore, Approximate Time Required to double initial investment = 72 / 4 = 18 years

NOTE: In reality it takes approximately 17.67 years to double an investment at an annual rate of 4%.The rule of 72 gives only an approximate value.

NOTE: Please raise a separate query for the second question.

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