Question

Connor Corp. has large amount of data that they are trying to analyze from the last 15 years. They have an arithmetic sales growth average of 12% and a geometric average growth of 9%. Using Blume’s formula, what would the forecast sales growth be for the next five years?

Answer 1

Answer:

11.14%

Explanation:

Blume's formula is used to combine both arithmetic and geometric returns. This is because using arithmetic growth rate exclusively would be overly optimistic for longer time horizons and on the other hand, using geometric growth rates exclusively would be overly pessimistic for short time horizons.

Using the attached formula, plug in the given numbers;

R(T) would be the sale growth rate we need to calculate.

R(T) = $\frac{5-1}{15-1} *0.09 + \frac{15-5}{15-1} *0.12$

R(T) =0.0257 + 0.0857

R(T) = 0.1114 as a decimal

Therefore, the forecast sales growth would be 11.14%