## Answers

Question 1:

The rule of 72 follows compound interest curve. For example, if an investment grows to twice of initial investment at the end of 2 years , it will grow to 4 times of initial investment at the end of 4 years (i.e, 2*2) and similarly 8 times initial investment at the end of 6 years ( i.e., 2*3).

For investment A, the principal investment of $12,500 grows to $50,000 at the end of 6 years. Thus, the initial investment grows to 4 times the initial investment at the end of 6 years. Thus, as per compound interest curve, investment would grow to twice of initial investment at the end of 3 years. The 72 rule says: time (T) to double investment = 72 / R (rate of interest).

Here, T = 3 years.

%

Question 2:

As per CAGR rule: Final amount=A; Initial investment =P; Time=T; Rate of interest =R

Investment A | Investment B | |

CAGR | R=26% | R=12.25% |

72 Rule | R=24% | R=12% |

Thus, Answer is option E.

The rule of 72 does a better job of estimating the rate of return of investment B than A. &2 rule, underestimates the rate o return on Investment A by 2%.

Question 3:

As per CAGR (Compound Annual Growth Rate):

Here, T=20; A=20$, R=10%

20=P(1+10/100)^{20}

P= $1.05 which is 5% of $20.

Thus answer is option A.

Question 4:

Answer is option e. As leverage ratio gives an indication of how the company's assets and business operations are financed (debt or equity). Common leverage ratios are Debt/Equity ratio, Debt//Capital Ratio and Debt/Total Asset ratio.