Understanding the Concepts – Market Prices, Valuation Principle, Net Present Value, Interest Rates, and Bonds

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Date Submitted: 08/18/2011 04:33 PM

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Explain why market Prices are helpful to the financial managers.

The market price which is the economic price for which a good or service is offered in the market place. Primarily determined by the interaction of supply and demand and a major aim for every economic activity and financial manager’s portfolio. The financial manager is concerned with procurement, use of fund and the prevailing price at hand. The market price is an extremely effective factor in assisting financial managers makes decisions which are in the best interest of the organization. The financial manager uses market price to ascertain profit maximization. Since profit earning is the main aim of every economic activity, a business been an economic institution must understand how prices work to earn profit in order to cover costs and provide funds for goods. Increased market prices gives the financial manager an edge for profit, while a fall in price prepares the financial manager to face tasks which cannot be ensured as well as competitive for other units, adverse government policies, etc..

Also, the prices paid for the surplus funds are for borrowing to upgrade the firm, and are always at the market price. Financial managers use this to get the creditability of trust for an existing firm. No activity should exceed market value.

Discuss how the valuation principle helps financial managers make decisions.

Businesses or fractional interests in business may be valued for various purposes depending on the outcome of the financial manager’s decision. This decision is determined from how much an asset, company, or anything else is worth and appreciated in the market, perhaps the competitive market. This is a market in which a good can be bought and sold at the same price. Whenever a good trades in the competitive market, that price determines the value of the good. This point is one of the central and most powerful ideas in the financial manager’s decision on valuation principle.

The valuation...