Rate of growth: Link Net, Inc. just generated earnings per share of $3.75 for the fiscal year ending September 30, 2010. The firm is expected to achieve earnings per share of $8.76 in 5-years. At what rate will Link Net, Inc.'s earnings per share be growing over this 5-year period? (Round off to the nearest 1/10 percent)

Question

Quizplus · Accepted Answer

We can use the formula for compound annual growth rate (CAGR) to solve for the rate of growth:

CAGR = (Ending value / Beginning value)^(1/n) - 1

In this case, the beginning value is the EPS for the fiscal year ending September 30, 2010 ($3.75), the ending value is the EPS expected in 5 years ($8.76), and n is the number of years (5).

CAGR = ($8.76 / $3.75)^(1/5) - 1
CAGR = 0.185 or 18.5%

Therefore, the rate of growth for Link Net, Inc.'s earnings per share over the 5-year period is 18.5%. The best choice is B.

Rate of Growth: Link Net, Inc