Finance Q & A

1. Explain why market prices are useful to the financial manager.

The financial manager is responsible for giving financial advice and support to clients and colleagues that
will enable them to make good business decisions. Particular work environments differ considerable and
involve both public and private sector organizations such as retailers, corporations, financial institutions,
charities, and even small manufacturing companies and schools (Financial Manager, 2011).
Primarily, financial managers look at the market price in maximizing the value of the firm. The market
value is the present value of the net cash flow divided buy the risk. Investors consider the firms future
and present earnings, disadvantages or risks and other factors that will influence a firm prior to deciding
to create an investment decision and the market price of the stock that will reflect all the information
considering these factors (Arain, 2011).
2. Discuss how the Valuation Principle helps a financial manager make decisions.
Valuation Principle is the analysis between values of benefits and costs. This gives an understanding for
creating decisions in a company. When valuing a company in a competitive market. Its good price will
always be the basis rather than the preference or opinion of a person or a firm. Hence, the valuation
principle is the commodity or asset to the investors or firm that is recognized by the competitive market.
The financial manager will weigh the costs and benefits of decision in utilizing that market price. Of
course, if the benefits exceed the costs, the decision made by the financial manager will increase
because of the firms market value (Fundamentals of Corporate Finance, 2011).
3. Describe how the Net Present Value is related to cost-benefit analysis.
Cost benefit analysis is employed in order to evaluate projects. This gives the researcher or planner a set
of values that is useful enough in determining the feasibility of a project from an economic point of view.
Generally, it is simple and the results are easy to comprehend. Costs are associated with the company
that is commonly much easier to measure and defined compared to benefits. This involves the operating
and investment costs. Operating costs involves the materials needed to maintain an operation whilst the
investment costs are incurred in planning and design such as the materials, labor, and construction costs.
Benefits are, on the other hand, difficult to measure specifically for transport projects. These are diffused
and extensive (Slack and Rodrigue, 2011).
The relationship of net present value does not reside particularly on the cost-benefit per se rather it is
viewed as part of the valuation principle. Net Present Value (NPV) is the difference concerning the
present value of the project or the benefits of the investment compared to the present cost values. When
the NPV positive for a project or investment opportunity, this means that the project can be implemented.
It only means that the firms value and the wealth of the investors are increased. In contrast, negative
NPV of the investments and projects would mean losing the money of the company if ever the project
was implemented. This is in accordance with the NPV decision rule. In investment alternatives, the
highest NPV investment alternative should be chosen. Think of it as receiving the NPV in cash once the
highest NPV alternative is chosen. Now, if the projects NPV is zero, the investment may show a gain or
loss on the project (Fundamentals of Corporate Finance, 2011).
4. Explain how an interest rate is just a price.
Prices actually signal the rise and fall of market economics. Basically, the answer starts with the concept
of supply and demand. When the supply and demand equalize, the price falls. The falling price will make
a notion for entrepreneurs to switch their investment to another place that will lower production level. In
contrast, this will lower the supply versus the demand thus increasing the price. This increase in prices
will trigger entrepreneurs to return to their previous investments thus increasing the supply and satisfying
the demand of the market. Nonetheless, in our time today, the government controls the price of
everything that will not reflect the supply and demand. Hence, this is not the guide for investment and
entrepreneurial activity. In other words, no one knows exactly when the market prices will fall or rise or
whether we need more supplies or not. This will produce a surplus or shortage. In relation to interest rates
or the loaned capital, the prices became more involved with borrowing money. Because nobody knows
when the prices or supplies will change, entrepreneurs now switched to a more convenient indicator that
is, interest rates. When the savings become short, the demand for loans becomes high thus increases the
interest rates. When this happens, the demand for loans decreases but also increases the motivation for
entrepreneurs to save thereby lowering the interest rates. This repeats the cycle all over again
(Clougherty, 2011).
5. Describe how a bond is like a loan.
Stocks and bonds are considered securities in the entrepreneurial world. When a bond is held upon as a
debt security, this means that the bond issuer owes the bond holder a particular debt. Furthermore, if the
bond indicates terms, the issuer is needed to involve the interest or what they call the coupon. Looking at
the bond as a loan is simple. When the bond has a borrower like a loan, there is a bond issuer. The
holder is the lender for the bond. In turn, the companies use the bonds in order to attract funds used to
pay long-term investments and projects (The Basics of a Bond, 2011).



Works Cited

Arain, S.A. (2011). Role of Financial Manager. Retrieved on July 8, 2011 from
http://www.scribd.com/doc/16029526/Role-of-Financial-Manager.
Clougherty, T. (2011). Interest Rates and the Price System. Retrieved on July 8, 2011 from
http://www.adamsmith.org/blog/tax-and-economy/interest-rates-and-the-price-system/.
Financial Manager. (2011). Retrieved on July 8, 2011 from
http://www.prospects.ac.uk/financial_manager_job_description.htm.
Fundamentals of Corporate Finance. (2011). Chapter 3 The Valuation Principle: The Foundation of
Financial Decision Making. Retrieved on July 8, 2011 from
http://su3finance.wikispaces.com/Chapter+3+%E2%80%93+The+Valuation+Principle-
The+Foundation+of+Financial+Decision+Making.
Slack, B. &ump; Rodrigue, J.P. (2011). Cost/Benefit Analysis. Retrieved on July 8, 2011 from
http://people.hofstra.edu/geotrans/eng/ch9en/meth9en/ch9m1en.html.
The Basics of a Bond. (2011). Retrieved on July 8, 2011 from http://investing-school.com/definition/the-
basics-of-a-bond/.

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