Financial Terms Simple compound growth method

Definition of Simple compound growth method

Simple compound growth method

A method of calculating the growth rate by relating the terminal value to
the initial value and assuming a constant percentage annual rate of growth between these two values.

Related Terms:

Capitalization method

A method of constructing a replicating portfolio in which the manager purchases a
number of the largest-capitalized names in the index stock in proportion to their capitalization.

Compound interest

Interest paid on previously earned interest as well as on the principal.

Compound option

Option on an option.

Compounding

The process of accumulating the time value of money forward in time. For example, interest
earned in one period earns additional interest during each subsequent time period.

Compounding frequency

The number of compounding periods in a year. For example, quarterly
compounding has a compounding frequency of 4.

Compounding period

The length of the time period (for example, a quarter in the case of quarterly
compounding) that elapses before interest compounds.

Constant-growth model

Also called the Gordon-Shapiro model, an application of the dividend discount
model which assumes (1) a fixed growth rate for future dividends and (2) a single discount rate.

Continuous compounding

The process of accumulating the time value of money forward in time on a
continuous, or instantaneous, basis. Interest is earned continuously, and at each instant, the interest that
accrues immediately begins earning interest on itself.

Current rate method

Under this currency translation method, all foreign currency balance-sheet and income
statement items are translated at the current exchange rate.

Direct estimate method

A method of cash budgeting based on detailed estimates of cash receipts and cash
disbursements category by category.

Discrete compounding

compounding the time value of money for discrete time intervals.

Dividend growth model

A model wherein dividends are assumed to be at a constant rate in perpetuity.

Flow-through method

The practice of reporting to shareholders using straight-line depreciation and
accelerated depreciation for tax purposes and "flowing through" the lower income taxes actually paid to the
financial statement prepared for shareholders.

Growth manager

A money manager who seeks to buy stocks that are typically selling at relatively high P/E
ratios due to high earnings growth, with the expectation of continued high or higher earnings growth.

Growth opportunity

Opportunity to invest in profitable projects.

Growth phase

A phase of development in which a company experiences rapid earnings growth as it produces
new products and expands market share.

Growth rates

compound annual growth rate for the number of full fiscal years shown. If there is a negative
or zero value for the first or last year, the growth is NM (not meaningful).

Growth stock

Common stock of a company that has an opportunity to invest money and earn more than the
opportunity cost of capital.

Internal growth rate

Maximum rate a firm can expand without outside source of funding. growth generated
by cash flows retained by company.

Log-linear least-squares method

A statistical technique for fitting a curve to a set of data points. One of the
variables is transformed by taking its logarithm, and then a straight line is fitted to the transformed set of data
points.

Monetary / non-monetary method

Under this translation method, monetary items (e.g. cash, accounts
payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g.
inventory, fixed assets, and long-term investments) are translated at historical rates.

Net present value of growth opportunities

A model valuing a firm in which net present value of new
investment opportunities is explicitly examined.

Normalizing method

The practice of making a charge in the income account equivalent to the tax savings
realized through the use of different depreciation methods for shareholder and income tax purposes, thus
washing out the benefits of the tax savings reported as final net income to shareholders.

Present value of growth opportunities (NPV)

Net present value of investments the firm is expected to make
in the future.

Purchase method

Accounting for an acquisition using market value for the consolidation of the two entities'
net assets on the balance sheet. Generally, depreciation/amortization will increase for this method compared
with pooling and will result in lower net income.

Realized compound yield

Yield assuming that coupon payments are invested at the going market interest
rate at the time of their receipt and rolled over until the bond matures.

Residual method

A method of allocating the purchase price for the acquisition of another firm among the
acquired assets.

Simple prospect

An investment opportunity where a certain initial wealth is placed at risk and only two
outcomes are possible.

Simple interest

Interest calculated only on the initial investment. Related:compound interest.

Simple linear regression

A regression analysis between only two variables, one dependent and the other explanatory.

Simple linear trend model

An extrapolative statistical model that asserts that earnings have a base level and
grow at a constant amount each period.

Simple moving average

The mean, calculated at any time over a past period of fixed length.

Statement-of-cash-flows method

A method of cash budgeting that is organized along the lines of the statement of cash flows.

Sustainable growth rate

Maximum rate of growth a firm can sustain without increasing financial leverage.

Temporal method

Under this currency translation method, the choice of exchange rate depends on the
underlying method of valuation. Assets and liabilities valued at historical cost (market cost) are translated at
the historical (current market) rate.

Allowance method

A method of adjusting accounts receivable to the amount that is expected to be collected based on company experience.

Direct method

A method of preparing the operating section of the Statement of Cash Flows that uses the companyâ€™s actual cash inflows and cash outflows.

Direct write-off method

A method of adjusting accounts receivable to the amount that is expected to be collected by eliminating the account balances of specific nonpaying customers.

Indirect method

A method of preparing the operating section of the Statement of Cash Flows that does not use the companyâ€™s actual cash inflows and cash outflows, but instead arrives at the net cash flow by taking net income and adjusting it for noncash expenses and the changes from last year in the current assets and current liabilities.

Compound Interest

Interest paid on principal and on interest earned in previous
periods

Continuous Compounding

The process of continuously adding interest to a principal plus
interest amount and calculating the resulting compound amount

Discrete Compounding

The process of adding interest to a principal plus interest amount
and calculating the resulting compound amount at specific
intervals, such as monthly or annually

Simple Interest

Interest paid only on the principal; calculated by multiplying the
interest rate by the principal

algebraic method

a process of service department cost allocation
that considers all interrelationships of the departments
and reflects these relationships in simultaneous
equations

compound interest

a method of determining interest in which interest that was earned in prior periods is added to the original investment so that, in each successive period, interest is earned on both principal and interest

compounding period

the time between each interest computation

direct method

a service department cost allocation approach
that assigns service department costs directly to revenueproducing
areas with only one set of intermediate cost
pools or allocations

dividend growth method

a method of computing the cost
of common stock equity that indicates the rate of return
that common shareholders expect to earn in the form of
dividends on a companyâ€™s common stock

FIFO method (of process costing)

the method of cost assignment that computes an average cost per equivalent
unit of production for the current period; keeps beginning
inventory units and costs separate from current period production
and costs

growth rate

an estimate of the increase expected in dividends
(or in market value) per share of stock

high-low method

a technique used to determine the fixed
and variable portions of a mixed cost; it uses only the highest
and lowest levels of activity within the relevant range

an informal method of adjusting for risk that allows the decision maker
to use logic and reason to decide whether a project provides
an acceptable rate of return

method of least squares

see least squares regression analysis

method of neglect

a method of treating spoiled units in the
equivalent units schedule as if those units did not occur;
it is used for continuous normal spoilage

modified FIFO method (of process costing)

the method of cost assignment that uses FIFO to compute a cost per
equivalent unit but, in transferring units from a department,
the costs of the beginning inventory units and the
units started and completed are combined and averaged

net present value method

a process that uses the discounted
cash flows of a project to determine whether the
rate of return on that project is equal to, higher than, or
lower than the desired rate of return

a formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk

simple interest

a method of determining interest in which interest is earned only on the original investment (or principal) amount

simple regression

a statistical technique that uses only one independent variable to predict a dependent variable

simplex method

an iterative (sequential) algorithm used to solve multivariable, multiconstraint linear programming problems

six-sigma method

a high-performance, data-driven approach to analyzing and solving the root causes of business problems

step method

a process of service department cost allocation
that assigns service department costs to cost objects after
considering the interrelationships of the service departments
and revenue-producing departments

strict FIFO method (of process costing)

the method of cost assignment that uses FIFO to compute a cost per equivalent unit and, in transferring units from a department, keeps the
cost of the beginning units separate from the cost of the
units started and completed during the current period

weighted average method (of process costing)

the method of cost assignment that computes an average cost per
equivalent unit of production for all units completed during
the current period; it combines beginning inventory units
and costs with current production and costs, respectively,
to compute the average

Bootstrapping, bootstrap method

An arithmetic method for backing an
implied zero curve out of the par yield curve.

First in, first-out costing method (FIFO)

A process costing methodology that assigns the earliest
cost of production and materials to those units being sold, while the latest costs
of production and materials are assigned to those units still retained in inventory.

Moving average inventory method

An inventory costing methodology that calls for the re-calculation of the average cost of all parts in stock after every purchase.
Therefore, the moving average is the cost of all units subsequent to the latest purchase,
divided by their total cost.

Payback method

A capital budgeting analysis method that calculates the amount of
time it will take to recoup the investment in a capital asset, with no regard for the
time cost of money.

Purchase method

An accounting method used to combine the financial statements of
companies. This involves recording the acquired assets at fair market value, and the
excess of the purchase price over this value as goodwill, which will be amortized
over time.

compound interest

Interest earned on interest.

constant-growth dividend discount model

Version of the dividend discount model in which dividends grow at a constant rate.

internal growth rate

Maximum rate of growth without external financing.

present value of growth opportunities (PVGO)

Net present value of a firmâ€™s future investments.

simple interest

Interest earned only on the original investment; no interest is earned on interest.

sustainable growth rate

Steady rate at which a firm can grow without changing leverage; plowback ratio Ă— return on equity.

Benefit Ratio Method

The proportion of unemployment benefits paid to a companyâ€™s
former employees during the measurement period, divided by the total
payroll during the period. This calculation is used by states to determine the unemployment
contribution rate to charge employers.

Benefit Wage Ratio Method

The proportion of total taxable wages for laid off
employees during the measurement period divided by the total payroll during
the period. This calculation is used by states to determine the unemployment
contribution rate to charge employers.

Savings Incentive Match Plan for Employees (SIMPLE)

An IRA set up by an employer with no other retirement plan and employing fewer than 100 employees,
into which they can contribute up to \$9,000 per year (as of 2004).

Average-Cost Inventory Method

The inventory cost-flow assumption that assigns the average
cost of beginning inventory and inventory purchases during a period to cost of goods sold and
ending inventory.

Completed-Contract Method

A contract accounting method that recognizes contract revenue
only when the contract is completed. All contract costs are accumulated and reported as expense
when the contract revenue is recognized.

Direct-Method Format

A format for the operating section of the cash-flow statement that reports actual cash receipts and cash disbursements from operating activities.

Equity Method

Accounting method for an equity security in cases where the investor has sufficient
voting interest to have significant influence over the operating and financial policies of an
investee.

First-In, First-Out (FIFO) Inventory Method

The inventory cost-flow assumption that
assigns the earliest inventory acquisition costs to cost of goods sold. The most recent inventory
acquisition costs are assumed to remain in ending inventory.

Full-Cost Method

A method of accounting for petroleum exploration and development expenditures
that permits capitalization of all such expenditures, including those leading to productive
as well as nonproductive wells.

Indirect-Method Format

A format for the operating section of the cash-flow statement that
presents the derivation of cash flow provided by operating activities. The format starts with net
income and adjusts for all nonoperating items and all noncash expenses and changes in working capital accounts.

Last-In, First-Out (LIFO) Inventory Method

The inventory cost-flow assumption that assigns the most recent inventory acquisition costs to cost of goods sold. The earliest inventory
acquisition costs are assumed to remain in ending inventory.

Percentage-of-Completion Method

A contract accounting method that recognizes contract
revenue and contract expenses as progress toward completion is made.

Successful Efforts Method

A method of accounting for petroleum exploration and development
expenditures that permits capitalization of expenditures only on successful projects.

Compound Interest

Interest earned on an investment at periodic intervals and added to principal and previous interest earned. Each time new interest earned is calculated it is on a combined total of principal and previous interest earned. Essentially, interest is paid on top of interest.

Critical Growth Periods

Times in a company's history when growth is essential and without which survival of the business might be in jeopardy.

Net Present Value (NPV) Method

A method of ranking investment proposals. NPV is equal to the present value of the future returns, discounted at the marginal cost of capital, minus the present value of the cost of the investment.

compounding

When an asset generates earnings that are then reinvested and generate their own earnings.

growth funds

Mutual funds that seek long-term capital growth. This type of fund invests primarily in equity securities.