Question

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2. It is commonly recommended that the managers of a firm compare the performance of their firm to that of its peers. Increasingly, this is becoming a more difficult task. Explain some of the reasons why comparisons of this type can frequently be either difficult to perform or produce misleading results. 3 Discuss the difference between book values and market values and explain which one is more important to the financial manager and why. List and briefly describe the three general areas of responsibility for a financial manager.

Answer 1

2. Comparisons cannot be done more often because companies may have varied businesses, different market capitalizations, different geographic areas and varied leverage than its peers.

3. Book Value is the acquisition value of any Asset/ Liability or Equity, market value is the current price of the Asset/ Liability or Equity. It is the market value which is very important for a manager as if the market value of Asset/ Liability or Equity goes below the book value means, the asset has degraded or equity has eroded and in case of liability, it means liability has reduced.

In case of a Decrease in Asset or equity, it is negative for the company. And if the liability goes down then it becomes positive for the company.

The responsibility of Financial Manager,

1. To maintain Liquidity in the company

2. To maintain the leverage ratios

3. To maintain the profitability of the company.