Market Prices, Valuation Principle, Net Present Value,
Interest Rates & Bonds
1. Explain why market prices are useful to a financial manager.
The competitive market is a place where a good can be bought and sold at the same price. Therefore, the value of a good that is sold in a competitive market is determined by its price. Market prices are used by the financial manager to determine if a decision has a positive influence on a company in relation to its cost-benefit analysis. The market price is a more scientific rationale, if you will, and takes away personal preference and opinions when a decision needs to be made for the company. The financial manager must make decisions for separate departments, as well as for the business as a whole. He has to be consistent in his buying choices and the rationale behind every decision must demonstrate that it was made to increase the firm’s value and the stockholder’s wealth. The market price is a way for the financial manager to remain consistent in day to day operations.
2. Discuss how the Valuation Principle helps a financial manager make decisions.
The Valuation Principle is the foundation of all financial decisions. It relies on the use of competitive market prices to help determine if it is in the company’s best interest to take on a new project. The financial manager is responsible for deciding whether or not the value of the benefits exceeds the value of the costs. If there is a positive correlation between the benefits and the costs, then the market value of the firm will increase and the project should be undertaken. There are times when the costs and benefits of a project occur at different times, making this a bit harder to figure out. The time value of money is the difference between the value of money today and money in the future. Whether we borrow money from the bank to use for a project or deposit money in the bank to use at a later time, the interest rate allows us to convert... [continues]
Interest Rates & Bonds
1. Explain why market prices are useful to a financial manager.
The competitive market is a place where a good can be bought and sold at the same price. Therefore, the value of a good that is sold in a competitive market is determined by its price. Market prices are used by the financial manager to determine if a decision has a positive influence on a company in relation to its cost-benefit analysis. The market price is a more scientific rationale, if you will, and takes away personal preference and opinions when a decision needs to be made for the company. The financial manager must make decisions for separate departments, as well as for the business as a whole. He has to be consistent in his buying choices and the rationale behind every decision must demonstrate that it was made to increase the firm’s value and the stockholder’s wealth. The market price is a way for the financial manager to remain consistent in day to day operations.
2. Discuss how the Valuation Principle helps a financial manager make decisions.
The Valuation Principle is the foundation of all financial decisions. It relies on the use of competitive market prices to help determine if it is in the company’s best interest to take on a new project. The financial manager is responsible for deciding whether or not the value of the benefits exceeds the value of the costs. If there is a positive correlation between the benefits and the costs, then the market value of the firm will increase and the project should be undertaken. There are times when the costs and benefits of a project occur at different times, making this a bit harder to figure out. The time value of money is the difference between the value of money today and money in the future. Whether we borrow money from the bank to use for a project or deposit money in the bank to use at a later time, the interest rate allows us to convert... [continues]
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