Managerial Finance: Market Prices - Assignment Example

A financial manager can buy a large lot of stocks if the prices of stocks are lower. 

Valuation Principle

The valuation principle can help financial managers make financial decisions regarding whether or not to buy a common stock. The use of valuation models can help a manager determine the intrinsic value of a corporation. The application of stock valuation models can be used to determine if the market price of a stock is over or undervalued. Common stocks that have a value lower than the market price should not be purchased, while stocks whose valuation exceeds the market price should be purchased.

Net Present Value

The net present value is an analytical tool that can be used to make capital decisions. The NPV takes into consideration all the inflows and outflows of money associated with a project to determine whether a project should be accepted or rejected (Besley & Brigham, 2000). Another important element of the NPV calculation is the fact the NPV incorporates the time value of money. The time value of money adjusts the values in order to consider inflation. Most corporate finance books have the time value of money tables. According to the NPV, a project should be rejected when the value of the NPV is negative. A project is accepted when the value is positive. The use of NPV calculation can be used to compare different projects. When comparing various projects the project that should be selected is the one with the highest NPV

Interest rate

Interest can be categorized as simply a price. The interest that a business pays on a loan is the price of that loan. For example, a person gets a loan from a friend of $100 and the friend asks for 20% interest on that loan. The $20 in interest that is paid is the price of that loan. The remaining $100 payment is the principal of the loan. 

Bonds

               A form of corporate financing bonds. A bond is a contractual agreement in which a company promises to pay the bond at maturity along with coupon payment as stipulated by the terms of the loan. For example, a company can sell a $1000 bond that matures in 3 years at 5% annual coupon payments. The company would pay yearly $50 in interest and after three years they would pay back the $1000 face value. A bond in essence acts the same way as a loan.