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June 2009 exam, for question on JJG Co
It is stated that the EPS increased with an average of 14.9% per year.How is the 14.9% calculated?
Is it by taking (18%+13%+14% )/ 3 years ?
No – you take the geometric mean (which I explain in my lectures in relation to dividend growth), and the answer actually says this!
the average growth rate = (third root of (1.18 x 1.13 x 1.14)) – 1 = 0.149 or 14.9%
Alternatively the average growth rate = third root (100/66) – 1 = 0.149 or 14.9%
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