Explain Why Market Prices are Useful to a Financial Manager

Topics: Net present value, Cost-benefit analysis, Cost Pages: 2 (855 words) Published: October 11, 2011
Explain why market prices are useful to a financial manager. A market price is the current price at which an asset or service can be bought or sold. (investopedia.com). Market prices are very useful to a financial manager. It helps with financial planning and it reflects the value of the assets based on GAAP (which refers to the Generally Accepted Accounting Principles). GAAP is just a set of guidelines that must be followed when it comes to any type of financial practice. Market price is also a crucial component of the balance sheet and can impact the financial statements. Market values reflect the amount someone is willing to pay today for an asset. Market values also reflect its historical costs. A financial manager has potential to maximize the company’s profits while utilizing this. Market value is equal to present value plus net cash flow. Discuss how the Valuation Principle helps a financial manager make decisions. The valuation principle is an analysis between the value of the benefits and the value of its costs. It is the foundation of financial decision making and it provides a basis for making decisions within a company. Understanding the valuation principle is very useful in assisting a financial manager in the company’s overall well being. The valuation principle also utilizes the market prices as well. “The value of a commodity or an asset to the firm or its investors is determined by its competitive market price. The benefits and costs of a decision should be evaluated using those market prices. When the value of the benefits exceeds the value of the costs, the decision will increase the market value of the firm.” (SU3finance) Describe how the Net Present Value is related to cost-benefit analysis. Net present value is the sum of discounted net cash flows over the period. It is also defined as the difference between the present value of a project or investment’s benefits and the present value of its costs. (SU3finance) When properly...
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