Explain Why Market Prices are Useful to a Financial Manager free essay sample

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. We will write a custom essay sample on Explain Why Market Prices are Useful to a Financial Manager or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 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. â€Å"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 calculated, the NPV is a relatively objective method of determining the improvement in national wealth resulting from a proposal. Cost-benefit analysis is the wider process of proposal selection. NPV analysis is just one tool which may be applied in Cost Benefit Analysis. Slack states, â€Å"Cost-benefit analysis (CBA or COBA) is a major tool employed to evaluate projects. It provides the researcher or the planner with a set of values that are useful to determine the feasibility of a project from an economic standpoint. † (Cost/Benefit Analysis) It produces easy results which are easy to comprehend. The end product is a â€Å"benefit-cost ratio that compares the total expected benefits to the total predicted costs. † (Slack) NPV is usually obtained from the cost-benefit analysis. It is obtained by subtracting the discounted costs and negative effects from the discounted benefits. A negative NPV should be rejected because society would be worse off. Explain how an interest rate is just a price. An interest rate is a rate which is charged or paid for using money. Price is the amount of money that is expected or required for something. That is basically what an interest rate is. Whenever you take out a loan, you are charged an interest rate. They expect you pay this certain amount in order to borrow their money. Also, the price of investment quality bonds is usually linked to interest rates. When interest rates rise, the price of a bond will decline. When interest rates fall, the price of a bond will rise. The interest rate is referred to the coupon rate of a bond. The coupon rate is the price that will be paid for the bond. Also, the fixed rate of interest will be the amount that will be paid when a bond is first issued, until the interest rate matures. Describe how a bond is like a loan. A bond is basically a debt security that is sold by a corporation or the government. Whenever the public wishes to borrow from the bank (including corporations), the bank issues out loans. You pay interest regularly on a bond and then on the principal amount sometime in the future like you would a loan.