Please explain this to me?

Question

If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100 percent, but the annual growth rate would be less than 10 percent. True or false? Explain.

Answer 1

True.

The average annual interest rate would be 7.18%. The reason it is not 10% is because of compounding. Each year the original amount earns 7.18%, but so does the amount that was earnid on the original amount. So the first year you have $1 earning 7.18%, but the second year you have $1.07 invested at that amount.

As you can see from that example, at first you are earning less than 0.10 each year, but as the balance grows, the amount earned will climb to be higher than 0.10. The average amount earned will be $0.10, but the average rate is 7.18%

Answer 2

Less than 10%. 10% a year would be higher because of the effect of compounding.