a. Test the Kule of 72 by co investment that grows at the indicated fixed rates compounded annually. Then check your estimates using the appropriate exponential model and base-10 logarithms for the first three estimates. Use NOW-NEXT reasoning to check the last three estimates. Rule of 72 Predicted Doubling Times Annual Interest Rate (percent) Predicted Doubling Time (in years) Actual Doubling Time (in years) 1 2 35 6 8 9 10 12 b. Current annual interest rates on money market investments are about 0.10%. How well does the Rule of 72 predict doubling time (in years) for this rate? c. Investments in the fast-growing Internet-based companies sector may have an annual growth rate of close to 35%. Assume a 35% growth rate for such an investment. Compare the predicted doubling time with the actual doubling time.
a. Test the Kule of 72 by co investment that grows at the indicated fixed rates compounded annually. Then check your estimates using the appropriate exponential model and base-10 logarithms for the first three estimates. Use NOW-NEXT reasoning to check the last three estimates. Rule of 72 Predicted Doubling Times Annual Interest Rate (percent) Predicted Doubling Time (in years) Actual Doubling Time (in years) 1 2 35 6 8 9 10 12 b. Current annual interest rates on money market investments are about 0.10%. How well does the Rule of 72 predict doubling time (in years) for this rate? c. Investments in the fast-growing Internet-based companies sector may have an annual growth rate of close to 35%. Assume a 35% growth rate for such an investment. Compare the predicted doubling time with the actual doubling time.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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You are interested in determining the intrinsic value of Hoffman Inc.
Your analysis shows that the firm’s growth rate will drop from its current pace by 20% each of the next two years, and then you estimate that dividends will continue to grow at the year 2 rate, with the same dividend policy in place, indefinitely.
Lastly, your estimate of the required return on the firm’s equity is 12%.
Hoffman’s recently published annual report shows the following financial relationships:
Assets = 1.4 x Equity
Current Assets = 1.7 x Current Liabilities
Sales = 1.5 x Assets
Net Income = 8% x Sales
Dividends = 30% x Net Income
Earnings per share (Basic) = $0.80 per share
Required:
- If all of your expectations remain as shown, except that, on the last day of year 1, the required return decreases by 1%. What would be your holding period return for the year?
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Holding Period return = [D1 + (P1 - Po)] / Po
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