Summary
This section outlines the methods used to value common stock by discounting expected cash flows, particularly dividends, using models such as the one?period valuation model and the Gordon growth model. It further examines how investor perceptions of risk and information lead to different required rates of return, which in turn determine market prices. The theories of rational expectations and the efficient market hypothesis serve as critical frameworks to understand how stock prices quickly adjust to new information, despite occasional market anomalies explained by behavioral finance. Overall, the material emphasizes that while models provide theoretical values, market prices are ultimately shaped by investor expectations, available information, and sometimes irrational investor behavior.