UNDERSTANDING FINANCE CONCEPTS

Understanding Finance Concepts



Understanding Finance Concepts

Question 1: Explain why market prices are useful to a financial manager (Mason, 2005).

A type of market where goods can be readily bought and sold simultaneously is called a competitive market. The prices of goods from the competitive market can be used to determine the current market value of that good. During the trade of the good, the value of the good is determined by their prices. The reason why these market prices are useful for financial managers is because they can determine costs and benefits for making appropriate decisions which may benefit the organization (Sheffrin 2003). The best decision for the organization can be determined by simply using market price to estimate the cost and benefit of a particular decision. The finest decisions are those whose benefits exceed their value of costs. Such decision makes both the organization and investors wealthy (Sheffrin 2003) (Mason, 2005).

Question 2: Discuss how the Valuation Principle helps a financial manager make decisions

Every finance manager has the task of making well calculated decisions for the shareholders and investors of the organization. Everyday these people face questions of production and investment etc (Sheffrin 2003). In an organization people propose different idea which may sound good but does not have any benefit for the company. The financial manager is responsible for breaking and analyzing the idea in a detailed manner to find its costs and benefits. The financial manager only makes a decision which is based on factual numbers (Sheffrin 2003). The valuation principle is the foundation of financial decision making. We also need to keep in mind that with such transactions, there is always the possibility of incurring transaction costs, or expenses such as broker commission and the bid-ask spread investors must pay in most markets in order to trade ...