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Let's get on with some examples and then we can do some in-depth analysis. We'll go back and look at the yearly per share earnings of General Foods:
To calculate the company's per share earnings annual compounding growth rate, treat the first year as your present value, in this case the 1970 earnings of $2.38. Then use the
1980 earnings of $5.14 as the future value. The number of years is ten. Now you punch these values into your calculator while it is in its financial mode and hit the CPT key followed by the %i key
Now do the same for the five-year period between 1975 and 1980, using as the present value the 1975 earnings of $3.02. The future value will be the earnings for 1980, $5.14.
Five is the number of years. Punch the CPT key followed by the %i key and the calculator will tell you that your annual compounding rate of growth will be 11.2% for the five-year period between
These two numbers tell you several different things. The first is that the company has had a higher rate of earnings growth in the last five years, 1975 to 1980, than it did in the
ten-year period from 1970 to 1980. The question you need to ask is, Why the change? And what effect will past economics have on our ability to predict the company's future earnings? What were
APPLICATION OF THE PER SHARE EARNINGS GROWTH TEST
Here is an application of the per share earnings growth test to Warren's purchase of 257,640 shares of Coca-Cola stock in 1994.
A check of Coca-Cola's per share earnings indicates the following:

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and get the annual compounding rate of growth for the ten years, which is 8%.

he business economics that caused this change? Was General Foods buying up its own stock, or was it finding new business ventures to be profitably involved in?

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