Question

Define these business finance terms in your own words and then give a real world example of each: Enterprise Value, Internal Growth Rate, Price-Earning Ratio, Sustainable Growth Rate, and Simple Interest vs. Compound Interest.

Answer 1

1. Enterprise value- enterprise value is calculated as worth of the total company and it is the economic value of the company so it would be including market capitalisation plus debt and minority interest along with preferred shares after adjusted with total cash and cash equivalents.

For example,Enterprise value is reflected as total worth of organisation

2. Internal growth rate is the growth rate which has been attained by the company without taking help of any of the external financing and it will only use the internal finance so it will be calculated as a product of retention ratio and return on equity.

For example, internal growth rate is without taking any help of any external financing and it is the internal financing used for growth.

3. Price to earning ratio is ratio of the market price to the Earning per share. It will reflect the valuation of a company in the market in respect to the earning.

For example, price to earnings ratio of Apple is 35

4. sustainable growth rate is growth rate which can be sustained by the company with external financing. it is a product of return on asset with retention ratio

For example the sustainable growth rate of Apple is 15%

5. Simple interest is the normal interest which does not calculate the effect of compounding whereas compounding interest will be compounding the overall impact of interest so compounding interest is interest on interest where as simple interest does not include interest on interest.

For example investment for future will include compounding interest.