long term financing Essay

Submitted By olutaiwo2005
Words: 941
Pages: 4

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 firm’s 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 firm’s 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 firm’s 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 project’s 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