The television commercial pitchman tells you he can double your ...

[Engineer]

The television commercial pitchman tells you he can double your money with a risk-free investment in just 10 years.
 
  If this is true, what interest rate must this risk-free investment earn on an annual basis? Solve this question using the Rule of 72 and then in a more exact fashion using a formula, your calculator, or computer. In today's rate environment, is the interest rate that you solved for a realistic annual rate of return for a risk-free investment?
  What will be an ideal response?

Question 2

A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statementcalled the external financing requiredof 230,000. The firm should prepare to ________.
 
  A) repurchase common stock totaling 230,000
  B) arrange for a loan of 230,000
  C) do nothing; the balance sheet balances
  D) invest in marketable securities totaling 230,000

[rnehls]

Answer to Question 1

Answer: Your 10-year risk-free investment would have to earn about 7.20 per year via the Rule of
72, where the rate is determined by dividing 72 by the time period or years = 7.20. A more exact result is found via the formula r = (FV/PV)1/n - 1 = (2/1)1/10 - 1 = 7.18. As this problem is written, 10-year treasury bonds are yielding close to 2.25, so an annual rate of 7.20 on a risk-free investment is not very likely. However, the correct answer to this portion of the question will depend on current economic conditions.

Answer to Question 2

B