Understanding Financial Concepts Assignment 1

In: Business and Management

Submitted By jklBritt
Words 331
Pages 2
1. Explain why market prices are useful to a financial manager.
It certainly depends on what industry you are in. A finance manager needs to know the price of things and getting a good handle on the market prices is a very good start. There is nothing more valuable to a shareholder or a director than a finance manager that saves the company heaps of money. Managers are interested in market prices for reasons better explain by market of economic theory. The classic market of economic theory is a call auction market where all market participants meet in one place at one time to arrive at a market clearing price through open outcry of bids and offers. In agricultural societies, these markets were often held annually, at harvest time, but the development of futures contracts has spread commodities trading over the year. Financial markets have traditionally been open each business day. As volume in many markets has grown, efficient continuous markets - some operating on a twenty-four-hour basis - have become the norm in currencies and in a few widely held securities.
In general, market forces have dealt effectively with the reallocation of price and rate risk and have provided liquidity through securitization and the allocation of capital to market making. Market forces have not yet dealt adequately with the risk of market discontinuities.
2. Discuss how the Valuation Principle helps a financial manager make decisions.
The concept of value is at the heart of financial management, yet the introductory case demonstrates that valuation of companies is by no means an exact science. Inability to make precisely accurate valuations complicates the task of financial managers.

The financial manager controls capital flows into, within and out of the enterprise attempting to achieve maximum value for shareholders. The test of his effectiveness is the extent to which these…...

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