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FIN 100 - Running head UNDERSTANDING THE CONCEPTS CHAPTER...

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Running head: UNDERSTANDING THE CONCEPTS CHAPTER 3-6 1 Net Present Value, Interest Rates, and Bonds 1. Explain why market prices are useful to a financial manager. Market prices are useful and important to financial manager because they may have to deal with several different problems related to debt in the firm or corporation capital structure. He must be
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UNDERSTANDING THE CONCEPTS CHAPTER 3-6 2 aware of the importance of analyzing terms and restrictions in terms of current market conditions, no terms are fair or unfair, and developing a bargaining strategy, i.e., deciding which terms are least and which are most desirable or critical, with which to approach negotiations. In that way concessions may be secured on provisions most important to the company. The manager may want to consider the possibility of using warrants as incentive financing in recognition of situations in which, in reality, part of the debt funds should be considered equity. 2. Discuss how the Valuation Principle helps a financial manager make decisions. Market prices are useful to a financial manager because market prices are used to assess the values of different commodities. Therefore, in order for a financial manager to make an efficient decision they have to be able to evaluate and compare the costs and benefits of investments and projects. Cost and benefits are easy to evaluate because current market prices can be converted into equivalent cash values. Thus, being able to express costs and benefits in terms of cash today makes the process of comparing them easy. This in return, allows the financial manager to make a decision that will increase the firm’s value. In addition, understanding market prices are useful
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