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An investor expects the price of a stock to double after eight years. What is the...

  1. An investor expects the price of a stock to double after

eight years. What is the expected annual rate of growth?

SOLVE USING RULE OF 72.

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Answer #1

Sol:

The RULE OF 72 is a method of estimating how long it will take compounding interest to double an investment.

The rule says that to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72. You can also run it backwards. If you want to double your money in eight years, just divide 8 into 72 to find that it will require an interest rate of approximate 9 percent.

Year (n) = 8 (Time to double)

Rate (r) = 72/n

Rate (r) = 72/8 = 9%

Therefore expected annual rate of growth is approximately 9%

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