CFA Level I · CFA Level I Exam · The Time Value of Money in Finance
A company's revenue was USD 120 million in Year 0 and USD 181 million in Year 6. Assuming steady compound growth, the annual growth rate is closest to:
The compound annual growth rate is about 7.1%. Take the ratio of ending to beginning revenue, 181/120, raise it to the power one-sixth and subtract one. Dividing the total growth by six overstates the rate because it ignores compounding.
- A5.1%
- B7.1%Correct
- C8.3%
Explanation
g = (181/120)^(1/6) − 1. The ratio is 1.50833; ln = 0.41096; divided by 6 = 0.068493; exp = 1.07089, so about 7.1%. Check: 1.0709^6 ≈ 1.508. The 8.3% figure comes from dividing the total growth of 50.8% by 6 (a simple average), which overstates the compound rate.
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