Willie A. McCall
Principles of Finance – Writing Assignment 1
Professor Eleanor Cook
30 January 2011
Manager’s Basic Tools Used for Making Financial Decisions
Explain why market prices are useful to a financial manager. A competitive market is one which a good can be bought and sold at the same price. We can use prices from competitive markets to determine the cash value of a good. Whenever a good trades in a competitive market, the price determines the value of the good. Financial Managers must be able to evaluate costs and benefits in order to make the appropriate decisions that benefit the company. Once we use the market prices to evaluate the cost and benefits of a decision in terms of cash today, it is then a simple matter to determine the best decision for the company. The best decisions make the company and its investors wealthier, because the value of its benefits exceeds the value of its cost. In a competitive market the value of a good is set by its price, and any personal opinion or preference is irrelevant when determining value. Discuss how the Valuation Principle helps a financial manager make decisions. The task of every financial manager is to make educated decisions on behalf of the investors and shareholders of each company. People in these positions are faced with questions regarding investments, production, etc.; each and every day of their lives. It is too often that within a company, someone will propose an idea that sounds good at the time but may not be of benefit. It is the job of the financial manager to break the idea down into detail to analyze the benefits and the costs, and then make a decision based on concrete numbers. This process is known as the Valuation Principle, an analysis between the value of the benefits and the value of its costs. It provides a basis for making decisions within a company. The Valuation Principle is known as the...