imported>Doug Williamson |
imported>Doug Williamson |
| Line 1: |
Line 1: |
| 1. ''Financial maths.'' | | 1. ''Shareholder value - management - analysis.'' |
|
| |
|
| In maths, compounding effects are the additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest.
| | The management and analysis of a firm's shareholder value, particularly in relation to its capital structure and funding, and in relation to any proposals for major acquisitions or disposals. |
|
| |
|
|
| |
|
| <span style="color:#4B0082">'''Example 1: Compounding for two years at 5% per annum'''</span>
| | 2. ''Supporting services.'' |
|
| |
|
| Interest quoted at 5% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:
| | External services supporting this activity, for example banking, legal or accounting advisory and reporting services. |
|
| |
|
| = (1.05 x 1.05) - 1
| |
|
| |
|
| = 10.25% for the two year period. | | == See also == |
| | | * [[Acquisition]] |
| | | * [[Capital ]] |
| Without the additional interest on interest, the total interest would have been simply
| | * [[Capital structure]] |
| | | * [[Corporate]] |
| 5% per annum x 2 years
| | * [[Corporate financial management]] |
| | | * [[Corporate treasury]] |
| = 10.00%.
| | * [[Financial planning and analysis]] |
| | | * [[Project finance]] |
| | | * [[Shareholder value]] |
| So the compounding effect of interest on interest here
| | * [[Transaction]] |
| | |
| = 10.25% - 10.00% | |
| | |
| = 0.25% over the two year period (= 5% x 5%). | |
| | |
| | |
| When both the number of periods and the rate of growth/interest are low, compounding effects are relatively small.
| |
| | |
| When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects quickly become very much larger.
| |
| | |
| | |
| | |
| <span style="color:#4B0082">'''Example 2: Compounding for two years at 50% per annum'''</span>
| |
| | |
| Sales are growing at 50% per annum, for two years.
| |
| | |
| This means that the total growth after two years is:
| |
| | |
| = (1.50 x 1.50) - 1
| |
| | |
| = 125% for the two year period.
| |
| | |
| | |
| Without the additional growth on growth, the total growth would have been simply
| |
| | |
| 50% per annum x 2 years
| |
| | |
| = 100%.
| |
| | |
| | |
| So the compounding effect of growth on growth here
| |
| | |
| = 125% - 100%
| |
| | |
| = 25% over the two year period (= 50% x 50%).
| |
| | |
| | |
| | |
| <span style="color:#4B0082">'''Example 3: Compounding for 20 years at 5% per annum'''</span>
| |
| | |
| Interest quoted at 5% per annum, compounded annually, for 20 years maturity, means that the interest accumulated after 20 years is:
| |
| | |
| = 1.05<sup>20</sup> - 1
| |
| | |
| = 165% for the 20-year period.
| |
| | |
| | |
| Without the additional interest on interest, the total interest would have been simply
| |
| | |
| 5% per annum x 20 years
| |
| | |
| = 100%.
| |
| | |
| | |
| So the compounding effect of interest on interest here
| |
| | |
| = 165% - 100%
| |
| | |
| = 65% over the 20-year period.
| |
| | |
| | |
| [[File:Compounding effects illustration.png|{850}px|850px]] | |
| | |
| | |
| 2. ''Risk management.''
| |
| | |
| Additional adverse consequences which occur when multiple adverse conditions arise at the same time.
| |
|
| |
|
|
| |
|
| :<span style="color:#4B0082">'''''Related global risks with compounding effects'''''</span>
| |
|
| |
|
| :"[Global] risks can also interact with each other to form a 'polycrisis' – a cluster of related global risks with compounding effects, such that the overall impact exceeds the sum of each part." | | ==Other resources== |
| | [[Media:2013_10_Oct_-_The_real_deal.pdf| The real deal - corporate valuation, growth and decline, The Treasurer]] |
|
| |
|
| :''World Economic Forum (WEF) - Global Risks Report 2023 - p57.''
| | ''Real rates of corporate decline often lead to miscalculation, overpaying for acquisitions and disastrous losses.'' |
|
| |
|
| | ''This article shows how to avoid the most common errors, save money and earn valuable exam marks.'' |
|
| |
|
| == See also ==
| | [[Category:The_business_context]] |
| * [[Adverse]]
| | [[Category:Corporate_finance]] |
| * [[Compound]]
| | [[Category:Investment]] |
| * [[Compound interest]]
| | [[Category:Long_term_funding]] |
| * [[Compounding factor]]
| |
| * [[Consequential risk]]
| |
| * [[Continuously compounded rate of return]]
| |
| * [[Exponential growth]]
| |
| * [[Geometric progression]]
| |
| * [[Global risk]]
| |
| * [[Linear]]
| |
| * [[Polycrisis]]
| |
| * [[Risk management]]
| |
| * [[Simple interest]]
| |
| * [[World Economic Forum]] (WEF)
| |
| | |
| [[Category:Manage_risks]] | |
1. Shareholder value - management - analysis.
The management and analysis of a firm's shareholder value, particularly in relation to its capital structure and funding, and in relation to any proposals for major acquisitions or disposals.
2. Supporting services.
External services supporting this activity, for example banking, legal or accounting advisory and reporting services.
See also
Other resources
The real deal - corporate valuation, growth and decline, The Treasurer
Real rates of corporate decline often lead to miscalculation, overpaying for acquisitions and disastrous losses.
This article shows how to avoid the most common errors, save money and earn valuable exam marks.
