Master

ESTIMATION OF GROWTH RATES

Question 1

|Year |EPS |Growth rate |

|1987 |$0.67 | |

|1988 |$0.77 |14.93% |

|1989 |$0.90 |16.88% |

|1990 |$1.10 |22.22% |

|1991 |$1.31 |19.09% |

|1992 |$1.51 |15.27% |

| | | |

|A. Arithmetic Average = | |17.68% |

|B. Geometric Average = | |17.65% |

C. The geometric average considers the compounded effects of growth. The arithmetic average does not.

Question 2

|A. Linear Regression = |EPS = 0.4413 + 0.172 (t) | | |

|Growth rate from this regression model equals |$0.172 a year. | |

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|B. Log-linear Regression = |EPS = -0.5841 + 0.1674 t | | |

|Growth rate from this regression model equals 16.74% a year. | |

| | | | | | |

|C. Expected EPS next year using linear regression: | |

|= 0.4413 + 0.172 (7) = $1.65 | |

|Expected EPS next year using log-linear regression: |

|= Exp(-0.5841 + 0.1674 (t)) = $1.80 |

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