Somars Company Earnings Growth Rate Calculation
What was the growth rate in earnings per share (EPS) over the 6-year period?
Six years ago, Somars Company earned $1.10 per share. Its earnings this year were $4.35. Choose the correct option:
a) 25.27%
b) 25.95%
c) 23.94%
d) 25.75%
e) 24.89%
Answer:
Six years ago, Somars Company earned $1.10 per share. Its earnings this year were $4.35. The growth rate in earnings per share (EPS) over the 6-year period is 25.95%. The correct answer is option (b).
The growth rate in earnings per share (EPS) over the six-year period can be calculated using the formula;
Growth rate = (End value / Initial value)^(1 / Number of years) - 1
We need to find the growth rate in EPS over the six-year period, given the earnings per share data for two years, namely, six years ago and the current year.
Earnings per share (EPS) six years ago = $1.10
Earnings per share (EPS) in the current year = $4.35
Number of years = 6
Using the formula,
Growth rate = ($4.35 / $1.10)^(1 / 6) - 1
Growth rate = 1.25^(1 / 6) - 1
Growth rate = 0.2595 or 25.95%
Therefore, the correct answer is option b) 25.95%.